persuasive advertising and product differentiation in a hotelling type differentiated products duopoly model we distinguish between three alternative ways that persuasive advertising may affect consumer perferences we illustrate the implications of our theory an contrast with results from models of informative advertising by analysing the relationship between the degree of product differentiation and equilibrium levels of advertising the analysis suggests that an positive relationship between equilibrium levels of advertising and inherent product substitutability is consistent only with advertising that increases perceived product differences

noncausality and the commodity currency hypothesis abstract this paper provides new evidence on the role of exchange rates in forecasting commodity prices consistent with previous studies we find that commodity currencies hold out of sample predictive power for commodity prices when using standard linear predictive regressions after we reconsider the evidence using noncausal autoregressions which provide a better fit to the data and are able to accommodate the effects of nonlinearities and omitted variables the predictive power of exchange rates disappears

analytical pricing of discrete arithmetic asian options with mean reversion and jumps abstract empirical evidence indicates that commodity prices are mean reverting and exhibit jumps as some commodity option payoffs involve the arithmetic average of historical commodity prices we derive an analytical solution to arithmetic asian options under a mean reverting jump diffusion process the analytical solution is implemented with the fast fourier transform based on the joint characteristic function of the terminal asset price and the realized average value we also examine the accuracy and computational efficiency of the proposed method through numerical studies

variance swap with mean reversion multifactor stochastic volatility and jumps abstract this paper examines variance swap pricing using a model that integrates three major features of financial assets namely the mean reversion in asset price multi factor stochastic volatility sv and simultaneous jumps in prices and volatility factors closed form solutions are derived for vanilla variance swaps and gamma swaps while the solutions for corridor variance swaps and conditional variance swaps are expressed in a one dimensional fourier integral the numerical tests confirm that the derived solution is accurate and efficient furthermore empirical studies have shown that multi factor sv models better capture the implied volatility surface from option data the empirical results of this paper also show that the additional volatility factor contributes significantly to the price of variance swaps hence the results favor multi factor sv models for pricing variance swaps consistent with the implied volatility surface

price volatility in niger millet markets price volatility of food staples is one of the most complex factors affecting food security recent food price crises have raised academic interest in improved volatility assessment the widely held assumption in econometric volatility models that long run volatility is constant has been recently questioned and partly blamed for these crises a multiplicative mgarch model recently proposed by bauwens et al is used in this article to model price volatility transmission along the niger millet marketing chain results suggest important volatility links between consumer and producer prices as well as noteworthy differences between short and long run price dynamics

advertising for attention in a consumer search model we model the idea that when consumers search for products they first visit the firm whose advertising is most salient the gains a firm derives from being visited early increase in search costs so equilibrium advertising increases as search costs rise as a result higher search costs may decrease both consumer welfare and firm profits we extend the basic model by allowing for firm heterogeneity in advertising costs firms that raise attention more easily advertise more but also charge lower prices and obtain higher profits as advertising cost asymmetries increase consumer surplus falls and aggregate profits rise

how much of commodity price behavior can a rational expectations storage model explain a rational expectations competitive storage model was applied to the u s corn market to assess the aptness of this framework in explaining monthly price behavior in an actual commodity market relative to previous models extensive realism was added to the model in terms of how production activities and storage costs are specified by modeling convenience yield backwardation in prices between crop years did not depend on the unrealistic assumption of zero ending stocks our model generated cash prices that were distributed with positive skewness and kurtosis and mean and variance that increased over the storage season comparable to the persistence and the occasional spikes observed in commodity prices futures prices were generated as conditional expectations of cash prices at contract maturity and the variances of futures prices exhibited realistic time to maturity and seasonal patterns model realizations of cash and futures prices over many years were used to demonstrate the wide variety of price behaviors that could be observed in an efficient market with a similar market structure implying that economic and policy implications drawn from short historical samples of prices could be misleading

option pricing with mean reversion and stochastic volatility many underlying assets of option contracts such as currencies commodities energy temperature and even some stocks exhibit both mean reversion and stochastic volatility this paper investigates the valuation of options when the underlying asset follows a mean reverting lognormal process with stochastic volatility a closed form solution is derived for european options by means of fourier transform the proposed model allows the option pricing formula to capture both the term structure of futures prices and the market implied volatility smile within a unified framework a bivariate trinomial lattice approach is introduced to value path dependent options with the proposed model numerical examples using european options american options and barrier options demonstrate the use of the model and the quality of the numerical scheme

addiction and cue triggered decision processes we propose a model of addiction based on three premises 1 use among addicts is frequently a mistake 2 experience sensitizes an individual to environmental cues that trigger mistaken usage 3 addicts understand and manage their susceptibilities we argue that these premises find support in evidence from psychology neuroscience and clinical practice the model is tractable and generates a plausible mapping between behavior and the characteristics of the user substance and environment it accounts for a number of important patterns associated with addiction gives rise to a clear welfare standard and has novel implications for policy

bubbles in food commodity markets four decades of evidence abstract we use daily prices from individual futures contracts to test whether speculative bubbles exist in 12 agricultural markets and to identify whether patterns of bubble behavior exist over time the samples begin as far back as 1970 and run through 2011 the findings demonstrate that all 12 agricultural markets experienced multiple periods of price explosiveness however bubble episodes represent a very small portion between 1 5 and 2 of price behavior during the 42 year period in addition most bubbles are short lived with 80 90 lasting fewer than 10 days though receiving far less attention negative bubbles contribute significantly to price behavior accounting for more than one third of explosive episodes markets over react during both positive and negative explosive episodes leading to a correction as they return to a random walk this adjustment back to fundamental values is most pronounced with positive bubbles particularly in the earlier part of the sample while the magnitudes of the corrections are generally small there were a few instances of significant increases in prices and large over reactions most notably in the softs e g cocoa 1973 coffee 1994 cotton 2010 we also find that explosive periods did not become more common or last longer in the second half of the sample period and that the most recent bubble episodes may not have been as severe as in mid 1970s

date stamping historical periods of oil price explosivity 1876 2014 article i nfo this paper sets out to date stamp periods of historic oil price explosivity using the generalized sup adf gsadf test procedure developed by phillips shi and yu 2013 the date stamping procedure used in this paper is ef fective at identifying periodically collapsing bubbles a feature found lacking with previous bubble detection methods weset out to identify periods of oilpriceexplosivity relative to the general price leveland oilinventory supplies in the us since 1876 and 1920 respectively the recursive identification algorithms used in this study identify multiple periods of price explosivity and as such provides future researchers with a reference for study ing the macroeconomic impact of historical periods of significant oil price build ups

a simple theory of advertising as a good or bad our analysis treats advertisements and the goods advertised as complements in stable metautility functions and generates new results for advertising by building on and extending the general analysis of complements by assimilating the theory of advertising into the theory of complements we avoid the special approaches to advertising found in many studies that place obstacles in the way of understanding the effects of advertising we also use this approach to evaluate advertising from a welfare perspective whether there is excessive or too little advertising depends on several variables the effects on consumer utility the degree of competition in the market for advertised goods the induced changes in prices and outputs of advertised goods and whether advertising is sold to consumers

who benefits from misleading advertising considering a model of price and misleading advertising competition between two brands producing horizontally and vertically differentiated brands we investigate allocative implications of misinformation and related regulatory policies although misinformation distorts consumers decision making misinformation can correct inefficiencies resulting from misallocation of goods thereby increasing welfare however advertising competition may create a prisoner s dilemma for firms and reduce welfare but smart consumers unaffected by misinformation and consumers preferring low quality brands may gain we also demonstrate how a biased policymaker who places different weights on producers and consumers surpluses behaves in response to misinformation disseminated by firms

multiple bubbles in the european union emission trading scheme abstract the european union emission trading scheme eu ets is the first large scale co 2 emission trading system in the world carbon allowances are financial assets potentially vulnerable to the behavior of traders and investors in fact the carbon price has been quite volatile since the inception of the market and it has recently hit very low values however to date no work exists to evaluate whether volatility and price spikes are due to episodes of speculation and price bubbles our paper fills this gap we use the recent approaches developed by phillips and yu 2010 phillips et al 2011 and phillips et al 2015a 2015b who propose a recursive right sided unit root approaches to detect and date stamp mildly explosive behaviors and carbon market exuberance we complement this methodology by using the wild bootstrap procedure by goncalves and kilian 2004 to control for the heteroschedasticity of carbon price data analyzing the eu ets front month contract price from 2005 to 2014 we find different episodes of price bubbles these episodes are not explained by similar behavior of the fundamentals but seem related to energy and environmental policy announcements our results can provide insightful policy implications in the context of the actual carbon market reform as well as the implementation of stricter financial regulations rules to co 2 trading

pricing discrete path dependent options under a double exponential jump diffusion model abstract we provide methodologies to price discretely monitored exotic options when the underlying evolves according to a double exponential jump diffusion process we show that discrete barrier or lookback options can be approximately priced by their continuous counterparts pricing formulae with a simple continuity correction the correction is justified theoretically via extending the corrected diffusion method of siegmund 1985 we also discuss the jump effects on the performance of this continuity correction method numerical results show that this continuity correction performs very well especially when the proportion of jump volatility to total volatility is small therefore our method is sufficiently of use for most of time

implications of commodity price behavior for marketing strategies prices of agricultural commodities have systematic dynamic components and many agricultural economists have thought that forecasts of this behavior ought to aid marketing decisions thereby raising producers returns but if commodity markets are pricing efficient then noncompetitive profit opportunities should be quickly arbitraged away thus a debate exists about the magnitude of the likely benefits of various marketing strategies herein we address the question what does the literature about commodity price behavior contribute to our understanding of the expected outcomes from alternative marketing strategies our brief answer is as follows spot prices in u s commodity markets typically behave in a way that is consistent with efficient markets systematic behavior persists because of the costs of arbitrage hence price forecasts in the public domain cannot be used to produce returns which are consistently above the competitive norm although low cost strategies to manage price risk exist evaluating the evidence on these topics is not easy however because the price generating processes are complex sometimes prices seem to behave as if a market is inefficient advice based on analyses using short samples should be used with great caution the remainder of the article elaborates

commodity prices and unit root tests price theory suggests that commodity prices should be stationary series yet tests for unit roots rather frequently imply that these prices are not stationary this seeming inconsistency is investigated by applying alternative specifications of unit root tests to prices of corn soybeans barrows and gilts and milk the preponderance of evidence suggests that nominal prices do not have unit roots but the results are sensitive to the specification of the test equation accounting for a structural change that shifts the mean appears to be an important issue in unit root tests

bootstrap inference in econometrics the astonishing increase in computer performance over the past two decades has made it possible for economists to base many statistical inferences on simulated or bootstrap distributions rather than on distributions obtained from asymptotic theory in this paper i review some of the basic ideas of bootstrap inference the paper discusses monte carlo tests several types of bootstrap test and bootstrap confidence intervals although bootstrapping often works well it does not do so in every case

jump processes in commodity futures prices and options pricing empirical evidence shows that log return relatives on commodity futures prices are not normally distributed this departure from normality seems to be caused by large price changes occurring in the commodity markets with the arrival of important new information this suggests that a jump diffusion model may be a plausible choice for modeling the stochastic process underlying commodity option prices merton 1976a develops a jump diffusion option pricing model assuming that jump risk is unsystematic however the jump diffusion model developed by bates 1991 is more appropriate for commodity option pricing since it allows jump risk to be systematic in this article recent transactions data on futures and futures options are used to test out of sample options using american versions of black s diffusion and bates s jump diffusion models the results show that bates s model performs considerably better than black s model jump diffusion asian option prices are also shown to differ considerably from geometric brownian motion asian option prices

price and advertising signals of product quality we present a signaling model based on ideas of phillip nelson in which both the introductory price and the level of directly uninformative advertising or other dissipative marketing expenditures are choice variables and may be used as signals for the initially unobservable quality of a newly introduced experience good repeat purchases play a crucial role in our model a second focus of the paper is on illustrating an approach to refining the set of equilibria in signalling games with multiple potential signals

an fft network for levy option pricing abstract this paper develops a simple network approach to american exotic option valuation under levy processes using the fast fourier transform fft the forward shooting grid fsg technique of the lattice approach is then generalized to expand the fft network to accommodate path dependent variables this network pricing approach is applicable to all levy processes for which the characteristic function is readily available in other words the log value of the underlying asset can follow finite activity or infinite activity levy processes with the powerful computation of fft the proposed network has a negligible additional computational burden compared to the binomial tree approach the early exercise policy and option values in the continuation region are determined in a way very similar to that of the lattice approach numerical examples using american style barrier lookback and asian options demonstrate that the fft network is accurate and efficient

three bubbles and a panic an explanatory review of recent food commodity price events abstract this paper is a summary of the behaviour of food commodity prices in 2007 2008 and a review of the causes of the price increases extracted from a report to the chief scientific advisor to her majesty s government thirtle c piesse j 2008 an explanatory review of the world food commodity price events of 2007 2008 a report to the chief scientific advisor department for innovation universities and skills london the historical background shows that the price spike was much less severe than in the 1970s the conventional wisdom that prices of the main food commodities were falling prior to 2006 is questioned most ceased falling and were quite stable from the 1980s the paper separates the causes of the spike from the underlying changes driving the long run trends the literature on the causes of the spike is critically reviewed and summarised there is a reasonably broad consensus on most of the causes but much less on the impact of the depreciation of the us dollar there are also concluding speculations on the future

estimating the speed of adjustment to target levels the case of energy prices in this paper we propose a model that estimates the speed of energy price adjustment to its target level we also explain the source of price adjustment moreover we extract energy price bubbles and show that bubbles help explain price adjustment since ours is the first paper that develops an energy price adjustment model and links it to bubbles several avenues for future research have emerged from our analysis the first is to provide a theoretical framework for the bubbles and price adjustment mechanism the second direction of research will be to continue the search for other potential determinants of price adjustment

behavioural heterogeneity in wine investments we introduce a heterogeneous agent model to explain the dynamics of fine wine investments our results show evidence of the existence of both fundamentalists those who trade on mean reversion tow

mean reversion in equilibrium asset prices evidence from the futures term structure we use the term structure of futures prices to test whether investors anticipate mean reversion in spot asset prices the empirical results indicate mean reversion in each market we examine for agricultural commodities and crude oil the magnitude of the estimated mean reversion is large for example point estimates indicate that 44 percent of a typical spot oil price shock is expected to be reversed over the subsequent eight months for metals the degree of mean reversion is substantially less but still statistically significant we detect only weak evidence of mean reversion in financial asset prices in this study we provide evidence of mean reversion in the prices of several real and financial assets rather than examining evidence of ex post reversion using time series of asset prices we use price data from futures contracts with varying delivery horizons to test whether investors expect asset prices to revert this approach offers two advantages first since futures prices are readily available for many markets our procedure can be implemented for many assets including those for which reliable spot price data is elusive second there is little ambiguity as to the source of any mean reversion detected using our method subject only to the maintained assumption that the no arbitrage cost of carry condition holds our test detects mean reversion that is expected to occur in equilibrium but has no power to detect mean reversion resulting from noise or inefficiencies our methodology focuses on relations between price levels and the slope of the futures term structure defined as the change across delivery dates in the futures prices observed on a given trading date an inverse relation between prices and the futures term slope constitutes evidence that investors expect mean reversion in spot prices to illustrate initially assume there are no

price competition and advertising in oligopoly abstract this paper studies price advertising in an oligopoly market where consumers have only local price information sellers may attract consumers from other locations by advertising their price with positive probability they advertise a low price to attract customers from distant locations with the remaining probability they post a high price and serve only local customers the random advertising equilibrium approaches the equilibrium under perfect price information when the cost of advertising becomes small

asian and australian options a common perspective we show that australian options are equivalent to fixed or floating strike asian options and consequently that by studying asian options from the australian perspective and vice versa much can be gained one specific application of this australian approach leads to a natural dimension reduction for the pricing pde of asian options with or without stochastic volatility featuring time independent coefficients another application lies in the improvement of monte carlo schemes where the australian approach results in a path independent method we also show how the milevsky and posner 1998 result on the reciprocal approximation for asian options can be quickly obtained by using the connection to australian options further we present an analytical exact pricing formula for australian options and adapt a result of carr et al 2008 to show that the price of an australian call option is increasing in the volatility and by doing this answering a standing question by moreno and navas 2008

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

pitfalls in testing for explosive bubbles in asset prices a number of studies e g robert j shiller 1981 olivier j blanchard and mark watson 1982 kenneth d west 1988 have argued that dividend and stock price data are not consistent with the market fundamentals hypothesis in which prices are given by the present discounted values of expected dividends these results have often been construed as evidence for the existence of bubbles or fads related arguments have been made with respect to gold bonds and foreign exchange a major problem with such arguments e g james hamilton and charles whiteman 1985 is that apparent evidence for bubbles can be reinterpreted in terms of market fundamentals that are unobserved by the researcher behzad t diba and herschel i grossman 1984 1988b and hamilton and whiteman 1985 have recommended the alternative strategy of testing for rational bubbles by investigating the stationarity properties of asset prices and observable fundamentals 1 in essence the argument for equities is that if stock prices are not more explosive than dividends then it can be concluded that rational bubbles are not present since they would generate an explosive component to stock prices 2 using unit root tests autocorrelation patterns and cointegration tests to implement this procedure diba and grossman 1988b p 529 state that the analysis supports the conclusion that stock prices do not contain explosive rational bubbles this paper shows that the above battery of tests is in fact unable to detect an important class of rational bubbles the point is demonstrated by constructing rational bubbles that appear to be stationary when unitroot tests are applied even though they are explosive in the relevant sense simulations show that when such bubbles are present stock prices will not appear to be more explosive than dividends on the basis of these tests even though the bubbles are substantial in magnitude and volatility the presence of rational bubbles in actual stock prices thus remains an open question