s p 500 cash stock price volatilities s p 500 stock return volatilities are compared to the volatilities of a matched set of stocks after controlling for cross sectional differences in firm attributes known to affect volatility no significant difference in volatility is observed between 1975 and 1983before the start of trade in index futures and index options since then s p 500 stocks have been relatively more volatile the difference is statistically but not economically significant the relative increase occurs primarily in daily returns and only to a lesser extent in longer interval returns other factors besides the start of derivative trade could be responsible for the small increase in volatility stock price volatility has received much attention in the popular press over the last few years especially since the october 19 1987 stock market crash the rise in volatility has alarmed investors regulators and the public in general some suggest that the start of trade in stock index futures and index options increased speculative activity that in turn destabilized cash markets causing higher volatility large trading activity in the derivative contracts makes the suggestion plausible volume in index futures and index options increased dramatically since their introductions in 1982 and 1983 by 1987 the average daily dollar volume in the s p 500 futures contracts alone exceeded the dollar volume of cash s p 500 trade by a factor of about two while the dollar value of the daily net change in total open interest is about 8 of s p 500 stock dollar volume speculative trade in futures and options frequently is accused of destabilizing underlying cash markets the charge has been made for more than a century in the agricultural precious metal and currency markets recent evidence by french and roll 1986 showing stock variance to be strongly related to trading session hours heightens these concerns unfortunately theoretical analyses of whether speculative trade destabilizes cash markets lead to conflicting conclusions depending on what assumptions are made 1 school of business administration university of southern california and office of economic analysis u s securities and exchange commission i wish to thank mary denny mcsweeny and steve hornstein for their valuable research assistance and the referee and editor for their many suggestions and insights the opinions expressed in this paper do not necessarily reflect those of the u s securities and exchange commission or those of the author s colleagues on its staff an increase in well informed speculative trade has two opposite effects on measured volatility it decreases volatility due to order flow imbalances caused by uninformed traders because informed traders provide liquidity in such events and it increases volatility due to new fundamental information since the information which is assumed to be generated at discrete time intervals is impounded into

the determinants of an environmentally responsive firm an empirical approach abstract our empirical results indicate that a firm s formulation of an environmental plan is positively influenced by customer pressure shareholder pressure government regulatory pressure and neighborhood and community group pressure but negatively influenced by other lobby group pressure sources and a firm s sales to asset ratio firms which view environmental issues as important in the next 5 years are also more likely to have a plan relative to the manufacturing sector firms in the natural resource sector are more likely to formulate environmental plans while firms in the service sector are less likely to have plans our results provide insight into how firms react to environmental issues they also offer policymakers a list of determinants which can be used either as an alternative or complement to environmental regulation

bargaining in environmental regulation and the ideal regulator abstract we present a model of environmental regulation in which the stringency of a firm s emissions standard is determined by cooperative bargaining between the firm and a regulator we show that bargaining can be socially beneficial because it can achieve the first best outcome this outcome is never an equilibrium of the noncooperative stackelberg game we also show that the social cost function is not the preferred objective function for a regulator when regulations are determined by bargaining social costs are lower with a regulator that attaches more importance to damages and enforcement costs than to the firm s compliance costs

the impact of future carbon prices on ccs investment for power generation in china abstract carbon capture and storage ccs in china is currently discussed extensively but few in depth analyses focusing on economics are observed in this study we answer two related questions about the development of ccs and power generation technologies in china 1 what is the breakeven carbon dioxide price to justify ccs installation investment for integrated gasification combined cycle igcc and pulverized coal pc power plants and 2 what are the risks associated with investment for ccs to answer these questions we build a net present value model for igcc and pc plants with capacity of 600 mw with assumptions best representing the current technologies in china then we run a sensitivity analysis of capital costs and fuel costs to reveal their impact on the carbon price and analyze the risk on investment return caused by the carbon price volatility our study shows that in china a breakeven carbon price of 61 tonne is required to justify investment on ccs for pc plants and 72 tonne for igcc plants in this analysis we also advise investors on the impact of capital and fuel costs on the carbon price and suggest optimal timing for ccs investment

a transactions data test of stock index futures market efficiency and index arbitrage profitability this paper investigates the efficiency of the market for stock index futures and the profitability of index arbitrage for the chicago board of trade s major market index contracts the spot value of the index is computed with transactions prices for the component shares of the index obtained from the fitch database the tests account for transaction costs execution lags and the uptick rule for short sales of stocks results indicate that the size and frequency of boundary violations are substantially smaller than those reported by earlier studies and have declined sharply with time index arbitrage is a strategy whereby institutions brokerage houses or other large investors seek to profit from the spread between prices in the spot and futures markets for stock indices for example an investor might purchase predetermined baskets of stocks on the floor of the new york stock exchange and simultaneously sell a related index futures contract on the floor of the chicago board of trade hoping to profit from the price differences on the two exchanges computer programs constantly monitor stock and futures prices and automatically execute buy and sell orders when it appears that a profit is possible stock index futures can be priced by a simple arbitrage argument if the dividends paid by the underlying basket of shares and interest rates are nonstochastic markets are perfect and there are no taxes the pricing equation is

toward a theoretical model of voluntary overcompliance abstract we explain why some firms voluntarily overcomply with environmental regulation in our model all consumers value environmental quality but differ in their willingness to pay which depends on their income levels publicly available information on environmental performance of firms enables consumers to identify clean firms firms participate in a two stage duopoly game where they first choose their levels of cleaning technology and next engage in price competition the market gets segmented by income levels a minimum standard binding on the dirty firm has the effect of improving the performance of the cleaner firm a subsidy obtains the same competitive outcome

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

investment risks under uncertain climate change policy abstract this paper describes results from a model of decision making under uncertainty using a real options methodology developed by the international energy agency iea the model represents investment decisions in power generation from the perspective of a private company the investments are subject to uncertain future climate policy which is treated as an external risk factor over which the company has no control the aims of this paper are to i quantify these regulatory risks in order to improve understanding of how policy uncertainty may affect investment behaviour by private companies and ii illustrate the effectiveness of the real options approach as a policy analysis tool the study analysed firms investment options of coal and gas fired power plants and carbon capture and storage ccs technologies policy uncertainty is represented as an exogenous event that creates uncertainty in the carbon price our findings indicate that climate policy uncertainty creates a risk premium for power generation investments in the case of gas and coal fired power generation the risk premium would lead to an increase in electricity prices of 5 10 in order to stimulate investment in the case of ccs the risk premium would increase the carbon price required to stimulate investment by 16 37 compared to a situation of perfect certainty the option to retrofit ccs acts as a hedge against high future carbon prices and could accelerate investment in coal plant this paper concludes that to minimise investment risks in low carbon technologies policy makers should aim to provide some long term regulatory certainty

order characteristics and stock price evolution an application to program trading abstract this paper is an econometric analysis of the information content of automated orders arriving at the nyse the model captures the joint behavior of automated orders and also the return on the stock index future and the futures spot basis the results indicate that orders contain information useful in predicting stock returns beyond the information contained in the reported trades furthermore program and index arbitrage orders contain information beyond that available from the futures return and basis suggesting that these orders are not merely passive conveyors of common factor information nonprogram program and index arbitrage orders have roughly similar price impacts

optimal carbon taxes for china and implications for power generation welfare and the environment abstract china is expected to constitute about half of the world s emissions between 2010 and 2040 as concerns about climate change intensify the chinese government is poised to commit to a low carbon economy these conditions make china a suitable case in which to study how emission policies impact on energy supply welfare and the environment to achieve this purpose we incorporate abatement technologies into the gtap computable general equilibrium model and show that optimal taxes range between 0 03 for services and 2 02 for manufacturing in most cases simulated tax rates are by far higher than pollution taxes stipulated in the new chinese environmental tax law furthermore despite a decline in output of many sectors including the electricity sector overall welfare gains exist from introducing carbon taxes moreover these taxes reduce environmental pollution by approximately 62 5 in general carbon taxes are insufficient for mitigation in china and due to a coal dominant energy structure implementing these taxes leads to a decline in power generation hence the chinese aggressive investment strategy for renewable electricity technologies as stipulated in its 13th five year plan is understandable

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

instrument choice when regulators and firms bargain abstract we compare outcomes with an emissions tax and an emissions standard when a firm and regulator engage in cooperative bargaining over the stringency of the regulation bargaining is motivated by giving the firm a choice of abatement technologies if the firm s preferred technology differs from the regulator s the first best outcome is not an equilibrium of the traditional noncooperative game in which the regulator is a stackelberg leader the regulator may therefore choose to offer the firm a more lenient regulation if it agrees to switch technologies we find that the resulting bargaining outcomes differ for a tax and a standard even though information is symmetric and we identify conditions under which each instrument yields lower social costs

the economics of corporate social responsibility a firm level perspective survey this paper analyzes the economics of corporate social responsibility csr as a private response to market imperfections in order to satisfy social preferences depending on whether they affect regulation competition or contracts market imperfections driving csr decisions are classified in three categories public goods and bads and altruism imperfect competition and incomplete contracts we successively present these drivers of csr decisions and highlight the nature of incentives external or internal at work and the testable and tested hypotheses in the reviewed studies we finally review the link between csr and financial performance as well as between csr and social and environmental performance a twofold discrepancy appears in the literature opening future research paths a disconnection between our understanding of csr drivers and csr impacts and a knowledge gap between csr financial and social consequences the latter having received little attention

toward a new conception of the environment competitiveness relationship accepting a fixed trade off between environmental regulation and competitiveness unnecessarily raises costs and slows down environmental progress studies finding high environmental compliance costs have traditionally focused on static cost impacts ignoring any offsetting productivity benefits from innovation they typically overestimated compliance costs neglected innovation offsets and disregarded the affected industry s initial competitiveness rather than simply adding to cost properly crafted environmental standards can trigger innovation offsets allowing companies to improve their resource productivity shifting the debate from pollution control to pollution prevention was a step forward it is now necessary to make the next step and focus on resource productivity

state dependent enforcement to foster the adoption of new technologies harrington j public econ 37 29 53 1988 shows that a suitable strategy for regulators to make enforcement more efficient is to target surveillance resources according to past compliance records such scheme generates enforcement leverage as non compliance triggers greater future scrutiny increasing the expected costs of non compliance beyond the avoidance of immediate fines in this paper we propose an improved transition structure for the audit framework in which targeting is based not only on firms past compliance record but also on adoption of environmentally superior technologies we show that this transition structure would not only foster the adoption of new technology but also increase deterrence by changing the composition of firms in the industry toward an increased fraction of cleaner firms that pollute and violate less

voluntary environmental investment and responsive regulation instances of corporate voluntary environmental investments have been rising in recent years motivations for such activities include corporate image building regulatory preemption and production cost savings while some of these investments arise from industry attempts to set environmental standards where none currently exist many investments seem to be aimed at reducing the costs of complying with existing regulations using a simple game theoretic model we investigate firm motivations for and welfare consequences of these types of voluntary investments by focusing on the role regulatory enforcement might play we find that such investments unambiguously increase when an enforcement regulator acts as a stackelberg follower a regulatory structure we refer to as responsive regulation in setting its monitoring and enforcement strategy these additional investments may be socially undesirable necessitating a restructuring of non compliance penalties

carbon prices and ccs investment a comparative study between the european union and china abstract carbon capture and storage is considered as a key option for climate change mitigation policy makers and investors need to know when ccs becomes economically attractive integrating ccs in a power plant adds significant costs which can be offset by a sufficient co 2 price however most markets have failed currently the weak carbon price threatens ccs deployment in the european union eu in china a carbon regulation is appearing and ccs encounters a rising interest this study investigates two questions how much is the extra cost of a ccs plant in the eu in comparison with china second what is the co 2 price beyond which ccs plants become more profitable than reference plants in the eu and in china to address these issues i conducted a literature review on public studies about ccs costs to objectively assess the profitability of ccs plants i constructed a net present value model to calculate the levelised cost of electricity and the breakeven co 2 price ccs plants become the most profitable plant type beyond 115 tco 2 in the eu vs 45 tco 2 in china offshore transport and storage costs i advise on the optimal plant type choice depending on the co 2 price in both countries

a comparison of futures and forward prices abstract this paper uses the pricing models of cox ingersoll and ross 1981 richard and sundaresan 1981 and french 1982 to examine the relation between futures and forward prices for copper and silver there are significant differences between these prices the average differences are generally consistent with the predictions of the futures and forward price models however these models are not helpful in describing intra sample variations in the futures forward price differences this failure is apparently caused by measurement errors in both the price differences and in the explanatory variables

stock index futures and index arbitrage in a rational expectations model this article analyzes the role of stock index futures and index arbitrage in a rational expectations economy with competitive stock and futures markets a simple model is developed with three types of agents who besides having different trading motives have unequal access to markets among these agents only index arbitrageurs can trade on both markets and thus engage in arbitrage the article characterizes the impact of index arbitrage on equilibrium prices volatilities and welfare it is shown that index arbitrage is a risk reallocating and price correcting mechanism its impact on price stability is shown to be dependent on the relative variability of aggregate supply in the respective markets index arbitrage also transmits information across markets copyright 1991 by university of chicago press

index arbitrage with heterogeneous investors a smooth transition error correction analysis abstract the traditional index arbitrage model assumes a constant threshold mispricing between the futures and cash prices for all investors allowing for heterogeneity in investors transaction costs objectives and capital constraints we model the intraday mispricing of djia futures as a smooth transition autoregressive star process with the speed of adjustment toward equilibrium varying directly with the mispricing we show that the observed mean reversion in mispricing changes is induced by heterogeneous arbitrageurs instead of a statistical illusion infrequent trading of index portfolio stocks we further use a star error correction model to describe the nonlinear dynamics between the djia futures and index this model describes not only which market is more informationally efficient than the other but also the legging process the nonsimultaneous establishing of cash and futures positions

information and index arbitrage a random cash futures basis is derived in a dynamic multimarket learning game with sequential information shocks and strategic arbitrageurs who trade to exploit gaps in the basis statistical properties of the authors theoretical basis are derived both with and without index arbitrage the authors find that basis volatility a measure of intermarket mispricing may initially increase even as individual prices become more precise and that arbitrage reduces basis volatility the model is also used to analyze regulatory issues such as the possible impact of circuit breakers on the quality of the trading process copyright 1994 by university of chicago press

arbitrage in stock index futures the textbook description of arbitrage suggests that it is a straightforward matter of taking offsetting positions in different securities and realizing the arbitrage profit such descriptions however typically ignore the transaction costs that give rise to the arbitrage opportunity in the first place taking proper account of these transactions costs may considerably complicate the problem particularly when as is usually the case the arbitrage potential is restricted this article is concerned withoptimal arbitrage strategies with transaction costs when the arbitrage potential is restricted by position limits the particular case we shall analyze is the standard and poor s sp the corresponding figure for the s p 500 portfolio for the same period was

hedging performance and basis risk in stock index futures in early 1982 trading began at three different exchanges in futures contracts based on stock indexes stock index futures were an immediate success and quickly led to a proliferation of new futures and options markets tied to various indexes one reason for this success was that index futures greatly extended the range of investment and risk management strategies available to investors by offering them for the first time the possibility of unbundling the market and nonmarket components of risk and return in their portfolios many portfolio management and other hedging applications in investment banking and security trading have been described elsewhere1 ranging from use by a passive fund manager to reduce risk over a long time horizon to use by an underwriter to hedge the market risk exposure in a stock offering for one or two days in considering the potential applications of index futures it is clear that in nearly every case a cross hedge is involved that is the stock position that is being hedged is different from the underlying portfolio for the index contract 2 this means that return and risk for an index futures hedge will depend upon the behavior of the basis i e the difference between the futures price and the cash price hedging a position in stock will necessarily expose it to some measure of basis risk risk that the change in the futures price over time will not track exactly the value of the cash position basis risk can arise from a number of different sources and is a more significant problem for stock index contracts than for other financial futures like treasury bills and bonds 3 the most apparent cause of basis risk is the nonmarket component of return on the cash stock position since the index contract is tied to the behavior of an underlying stock market index nonmarket risk cannot be hedged this is the essential problem of a cross hedge however basis risk can be present even when the hedge involves a position in the index portfolio itself and there is no nonmarket risk for one thing returns to the index portfolio include dividends while the index and the index future only track the capital value of the portfolio any risk associated with dividends on the portfolio will become basis risk in a hedged position still dividends are fairly low and also quite stable so this may not be a terribly important shortcoming

voluntary pollution reductions and the enforcement of environmental law an empirical study of the 33 50 program abstract this paper studies determinants and effects of firms participation in the 33 50 program which is a voluntary pollution reduction vpr program initiated by government regulators we examine a wide range of explanations for voluntary corporate environmentalism and find evidence in support of an enforcement theory that predicts that 1 vpr participation is rewarded by relaxed regulatory scrutiny 2 the anticipation of this reward spurs firms to participate in the program and 3 the program rewards regulators with reduced pollution we also find that 33 50 participation was more likely for firms operating in states with larger environmentalist constituencies

optimal emission taxes for full internalization of environmental externalities abstract the present study proposes a set of optimal emissions fees that could be used to reduce the damages caused by industrial pollution the approach we use allows for the setting of pollution taxes at their economically appropriate level in particular tax rates are computed for china india and 19 sub saharan african countries all other world regions are grouped according to income level such as low income lower middle income upper middle income and high income economies our results show that constructed optimal pollution taxes range as high as 2 9 per 1 dollar of output for heavy manufacturing in the high income countries and as low as 0 01 in the service sectors of the low income countries these results show that a full internalization of the damages in each sector calls for raising the tax rates in some sectors and lowering them in others

carbon pricing and general equilibrium under leontief production technology abstract comparing temperature and emissions data does not clearly show a relationship between the two variables going further this study combines leontief production technology with a computable general equilibrium model of global trade in order to quantitatively test the implications of mitigation policies for welfare and the environment we compute optimal emissions taxes and show that administering carbon fees reduces environmental damages by nearly 50 however there is a tradeoff effect on production which calls for caution when implementing environmental policies in general environmental benefits and resources shifting due to carbon taxes lead to welfare gains

cost of power or power of cost a u s modeling perspective abstract future scenarios and assessment studies used to prepare for long term energy transitions and develop robust strategies to address climate change are highly dependent on the assessment of technology characteristics and availability the electric power sector in the united states recently experienced a significant cost escalation e g construction costs for large plants such as nuclear and coal fired power plants doubled between 2003 and 2007 we assess the main drivers of this escalation while many factors have affected costs some of the most significant include cost of materials particularly the price of metals and to a lesser extent cement possible increases in labor quantity requirements the aggressive worldwide competition for power plant design and construction resources driven by high demand in asia market and regulatory changes and general uncertainty about future regulations and climate policies we recalibrate power sector technology costs in the global change assessment model gcam based on an extensive literature review of recent post 2010 studies and in the process develop a coherent and updated set of current cost and performance assumptions for all major electricity generating technologies while current cost and performance assumptions of electricity generating technologies are key drivers of short term technology deployment and technology mix in the electricity sector medium and long term deployment pathways are significantly affected by assumed efficiency improvement rates and cost reductions we develop and demonstrate a method to project efficiency and construction cost of power plants and report a sensitivity analysis to explore the importance of such assumptions in future scenarios generated by gcam

the market liquidity of diamonds q s and their underlying stocks abstract we investigate the market liquidity effects of the introduction of index tracking stocks for the dow jones industrial average diamonds and the nasdaq 100 index q s our main finding is liquidity of the underlying djia 30 index stocks improves after the introduction of the exchange traded fund largely because of a decline in the cost of informed trading further we find the diamonds has significantly lower liquidity costs over the first 50 days of trading as compared to the portfolio of its component stocks again primarily because of lower adverse selection costs finally we find weaker but qualitatively similar results for the q s

taxes and the pricing of stock index futures stock index futures prices are generally below the level predicted by simple arbitrage models this paper suggests that the discrepancy between the actual and predicted prices is caused by taxes capital gains and losses are not taxed until they are realized as constantinides demonstrates in a recent paper this gives stockholders a valuable timing option if the stock price drops the investor can pass part of the loss on to the government by selling the stock on the other hand if the stock price rises the investor can postpone the tax by not realizing the gain since this option is not available to stock index futures traders the futures prices will be lower than standard no tax models predict on 24 february 1982 the kansas city board of trade began trading futures contracts on the value line average stock index during the next two months both the chicago mercantile exchange and the new york futures exchange also initiated trading in stock index futures although these contracts are actively traded their prices have puzzled both practitioners and academics the observed

the october 1987 s p 500 stock futures basis five minute changes in the s p 500 index and futures contract are examined over a ten day period surrounding the october 1987 stock market crash since nonsynchronous trading problems are severe in these data new index estimators are derived and used the estimators use the complete transaction history of all 500 stocks nonsynchronous trading explains part of the large absolute futures cash basis observed during the crash the remainder may be due to disintegration of the two markets even after adjustment for nonsynchronous trading the index displays more autocorrelation than does the futures and the futures leads the index

adoption of pollution prevention techniques the role of management systems and regulatory pressures this paper investigates the extent to which firm level technological change that reduces unregulated emissions is driven by regulatory pressures and firms technological and organizational capabilities using a treatment effects model with panel data for a sample of s p 500 firms over the period 1994 1996 we find that organizational change in the form of total quality environmental management leads firms to adopt pollution prevention practices after controlling for the effects of various regulatory pressures and firm specific characteristics we find that the threat of anticipated regulations and the presence of complementary assets is important for creating the incentives and an internal capacity to undertake incremental adoption of pollution prevention techniques

liquidity and the law of one price the case of the futures cash basis deviations from no arbitrage relations should be related to market liquidity because liquidity facilitates arbitrage at the same time a wide futures cash basis may trigger arbitrage trades and in turn affect liquidity we test these ideas by studying the dynamic relation between stock market liquidity and the index futures basis there is evidence of two way granger causality between the short term absolute basis and liquidity and liquidity granger causes longer term absolute bases shocks to the absolute basis predict future stock market liquidity the evidence suggests that liquidity enhances the efficiency of the futures cash pricing system copyright 2007 by the american finance association

an overview of co2 cost pass through to electricity prices in europe this paper investigates the link between wholesale electricity prices in europe and the co2 cost i e the price of european union allowances euas over the two first phases of the european union emissions trading scheme eu ets we set up a theoretical framework and an empirical model to estimate to what extent daily fluctuations of co2 costs may have impacted electricity prices regarding estimation results for the first phase of the eu ets about 42 of estimated pass through rates appear to be statistically significant while only one third of them are statistically different from zero in the second phase we try to improve those results by proposing alternative estimates based on the eu ets compliance periods

execution lags and imperfect arbitrage abstract this paper presents a simple equilibrium model of stock index arbitrage with endogenous execution lags we show that the resulting execution or immediacy risk reduces arbitrage activity and causes price differences between the two markets to persist

do voluntary pollution reduction programs vprs spur or deter environmental innovation evidence from 33 50 abstract we study whether a government sponsored voluntary pollution reduction program vpr promotes or deters the development of new environmental technologies that yield future emission reduction benefits using a panel of 127 u s manufacturing industries defined by 3 digit sic classifications over the 1989 2004 period we estimate impacts of industry level participation in the 33 50 program a vpr initiated by government regulators in 1991 on industry level rates of environmental patenting we find that higher rates of 33 50 program participation are associated with significant reductions in the number of successful environmental patent applications five to nine years after the program ended

voluntary environmental agreements good or bad news for environmental protection abstract there has been growing interest in the use of voluntary agreements vas as an environmental policy tool this article uses a simple model to determine whether vas are likely to lead to efficient environmental protection we consider cases where polluters are induced to participate either by a background threat of mandatory controls the stick approach or by cost sharing subsidies the carrot approach the results suggest that the overall impact on environmental quality could be positive or negative depending on a number of factors including the allocation of bargaining power the magnitude of the background threat and the social cost of funds