an energy efficient future a strategy for the uk abstract this article examines the national and international energy context within which a uk energy efficiency strategy would need to be formulated and also highlights the broader macroeconomic rationale for a more concerted approach it focuses particular attention upon the crucial role of the public sector including both the energy demand and supply sides and the need to review investment appraisal criteria in the energy sector

economics of a bottleneck abstract drawing on vickrey amer econ rev 59 251 261 1969 and subsequent literature this paper provides a thorough economic analysis of the simplest bottleneck model of road congestion with peak load demand in the morning rush hour a fixed number of identical individuals one per car must travel from home to work between which is a bottleneck of given capacity the costs of travel include queuing time and schedule delay time early or late for work the frequency distribution of departure times adjusts so that in equilibrium all individuals have the same travel costs the paper extends the previous literature by examining a coarse toll and solving for optimal capacities the application of congestion tolls can generate efficiency gains by altering the frequency distribution of departure times previous estimates of the efficiency gains from congestion tolling are likely to be substantially downward biased because they have ignored this effect

information and time of usage decisions in the bottleneck model with stochastic capacity and demand abstract this paper analyzes the effects of information on participation and time of use decisions for a facility subject to queueing congestion when there are predictable and unpredictable fluctuations in capacity and demand with constant elasticity demand and schedule delay cost functions expected social surplus is greater with perfect than with imperfect information but imperfect information can reduce welfare by inducing adverse changes in individuals times of usage this finding has implications for the design of emerging technologies such as advanced traveller information systems that provide information about usage conditions

the pricing of options on assets with stochastic volatilities one option pricing problem that has hitherto been unsolved is the pricing of a european call on an asset that has a stochastic volatility this paper examines this problem the option price is determined in series form for the case in which the stochastic volatility is independent of the stock price numerical solutions are also produced for the case in which the volatility is correlated with the stock price it is found that the black scholes price frequently overprices options and that the degree of overpricing increases with the time to maturity one option pricing problem that has hitherto remained unsolved is the pricing of a european call on a stock that has a stochastic volatility from the work of merton 12 garman 6 and cox ingersoll and ross 3 the differential equation that the option must satisfy is known the solution of this differential equation is independent of risk preferences if a the volatility is a traded asset or b the volatility is uncorrelated with aggregate consumption if either of these conditions holds the risk neutral valuation arguments of cox and ross 4 can be used in a straightfoward way this paper produces a solution in series form for the situation in which the stock price is instantaneously uncorrelated with the volatility we do not assume that the volatility is a traded asset also a constant correlation between the instantaneous rate of change of the volatility and the rate of change of aggregate consumption can be accommodated the option price is lower than the blackscholes b s 1 price when the option is close to being at the money and higher when it is deep in or deep out of the money the exercise prices for which overpricing by b s takes place are within about ten percent of the security price this is the range of exercise prices over which most option trading takes place so we may in general expect the b s price to overprice options this effect is exaggerated as the time to maturity increases one of the most surprising implications of this is that if the b s equation is used to determine the implied volatility of a near the money option the longer the time to maturity the lower the implied volatility numerical solutions for the case in which the volatility is correlated with the stock price are also examined the stochastic volatility problem has been examined by merton 13 geske 7 johnson 10 johnson and shanno 11 eisenberg 5 wiggins 16 and

bayesian analysis of structural credit risk models with microstructure noises in this paper a markov chain monte carlo mcmc technique is developed for the bayesian analysis of structural credit risk models with microstructure noises the technique is based on the general bayesian approach with posterior computations performed by gibbs sampling simulations from the markov chain whose stationary distribution converges to the posterior distribution enable exact finite sample inferences of model parameters the exact inferences can easily be extended to latent state variables and any nonlinear transformation of state variables and parameters facilitating practical credit risk applications in addition the comparison of alternative models can be based on deviance information criterion dic which is straightforwardly obtained from the mcmc output the method is implemented on the basic structural credit risk model with pure microstructure noises and some more general specifications using daily equity data from us and emerging markets we find empirical evidence that microstructure noises are positively correlated with the firm values in emerging markets

effects of demand uncertainty on optimal capacity and congestion tolls for urban highways abstract this paper presents an analytical treatment of the effect of uncertain demand on optimal highway capacity and congestion tolls the optimal capacity under conditions of uncertainty is larger relative to the mean level of road use than the capacity appropriate for the certainty case the optimal toll may be either larger or smaller depending on its effect on the variance of equilibrium road use

information communication technology and electricity consumption in emerging economies abstract this study examines the impact of information communication technology ict on electricity consumption in emerging economies the empirical results obtained from dynamic panel demand models show a positive and statistically significant relationship between ict and electricity consumption when ict is measured using internet connections mobile phones or the number of pcs long run ict elasticities are smaller than income elasticities but because ict growth rates are so much higher than income growth rates the impact of ict on electricity demand is greater than the impact of income on electricity demand one implication of these results is that policies designed to close the digital divide between developed and developing economics by increasing the adoption of ict in developing countries are put at odds with energy policies to reduce ghg emissions

the maximum likelihood estimation of security price volatility theory evidence and application to option pricing the market requires efficient estimation of the assuming security price dynamics are governed by a diffusion process and given the publicly most available form of data this paper provides the maximum likelihood estimator of security price volatility a monte carlo simulation compares the small sample properties of this and other proposed security price volatility estimators the resultant maximum likelihood estimator of the black scholes call option price formulation is also derived for small sample sizes a monte carlo simulation study facilitates comparison with other proposed estimation procedures also the statistically most powerful confidence intervals for the blackscholes call option price are constructed we would like to thank the participants of the statistics department seminar and finance department workshop at the university of michigan for their helpful comments we are especially grateful to fred hoppe adrian tschoegl and an anonymous referee for their insightful suggestions any remaining errors are our responsibility

scale economies analysis for urban highway networks abstract extending scale economies analysis from an individual highway to an urban highway network leads to an interesting new problem when demand increases in a network establishing a new long run equilibrium may require either increasing the capacities of existing links or adding new links e g new roads interchanges overpasses this paper develops a theoretical framework for analyzing economies of scale in this setting and then uses that framework to obtain a psuedo empirical estimate of returns to scale the results suggest that mild scale economies exist in urban highway travel

simulation based estimation of contingent claims prices a new methodology is proposed to estimate theoretical prices of financial contingent claims whose values are dependent on some other underlying financial assets in the literature the preferred choice of estimator is usually maximum likelihood ml ml has strong asymptotic justification but is not necessarily the best method in finite samples this paper proposes a simulation based method when it is used in connection with ml it can improve the finite sample performance of the ml estimator while maintaining its good asymptotic properties the method is implemented and evaluated here in the black scholes option pricing model and in the vasicek bond and bond option pricing model it is especially favored when the bias in ml is large due to strong persistence in the data or strong nonlinearity in pricing functions monte carlo studies show that the proposed procedures achieve bias reductions over ml estimation in pricing contingent claims when ml is biased the bias reductions are sometimes accompanied by reductions in variance empirical applications to u s treasury bills highlight the differences between thebondpricesimpliedbythesimulation basedapproachandthosedeliveredbyml some consequences for the statistical testing of contingent claim pricing models are discussed jel c11 c15 g12

information and usage of free access congestible facilities with stochastic capacity and demand we investigate the effect of information on users participation decisions at a free access congestible facility that is subject to unpredictable fluctuations in capacity and demand with demand isoelastic in user cost and user cost isoelastic in the ratio of demand to capacity optimal design capacity is larger with mean preserving spreads in capacity and demand if and only if demand elasticity is less than one expected welfare is greater with better information interestingly with nonconstant elasticity demand and or user costs information can be welfare reducing

did financial innovation hurt the great monetarist experiment in october 1979 the federal reserve announced a new commitment to fight inflation it signalled its resolve by a shift in policy tactics that placed greater emphasis on reducing the growth of money and less emphasis on limiting short run fluctuations in interest rates this shift in tactics was accomplished by a change in operating procedures that placed primary emphasis on controlling the growth of reserves available to depository institutions while greatly expanding the allowable range of fluctuations in the federal funds rate the growth of mi and other monetary aggregates did slow on average but money growth experienced large short term fluctuations interest rate movements increased as advertised but the extent of their fluctuation was severe inflation slowed markedly but this was primarily the consequence of a severe recession events gave grim testimony to the truth that it is possible to reduce inflation quickly by producing a sufficiently severe recession in the second half of 1982 with the economy in disarray and with growing concern about the ability of the financial system to withstand further strain the federal reserve abandoned its new operating procedures there was a shift back to the more comfortable world of stabilizing fluctuations in the federal funds rate there is considerable controversy over whether the federal reserve actually pursued a policy strategy that was consistent with the teachings of the book of monetarism concern about limiting money growth and using reserves as the operating variable are consistent with monetarism the extreme fluctuations in money growth during the period are not consistent with monetarist doctrine however perhaps the fed had not really embraced monetarism it may have found that focusing on money growth was a convenient means of absolving itself from responsibility for the record high interest rates that occurred conversely perhaps the fed did embrace the principles of monetarism but was unable to achieve steady money growth we shall never know for sure whether or not the federal reserve was really trying to perform a monetarist experiment on the american economy we do known however that the experiment was far from pure because of the substantial moneygrowth volatility that occurred there is also substantial controversy over the success of the experiment some observers argue that the primary aim of reducing inflation was achieved they proclaim the experiment a success others point out that this success was the consequence of a severe recession produced by high real interest rates and had nothing to do with monetarism per se this paper does not contribute to the debates concerning the nature and success of the great monetarist experiment rather it looks at the role played by financial innovation in complicating the pursuit of monetary policy during the period was the great experiment hurt by financial innovation more specifically did rapid financial innovation make it infeasible to target on mi or some other monetary aggregate and did innovation contribute to the extreme fluctuations in money growth and interest rates that occurred the conclusions from the discussion that follows is that financial innovation did not make it any less feasible to target on mi during 1979 82 than for other periods financial innovation does not appear to have made money growth an unusually unreliable target and innovation was not the source of the volatility of money growth and interest rates that occurred

a closed form garch option valuation model this paper develops a closed form option valuation formula for a spot asset whose variance follows a garch p q process that can be correlated with the returns of the spot asset it provides the first readily computed option formula for a random volatility model that can be estimated and implemented solely on the basis of observables the single lag version of this model contains heston s 1993 stochastic volatility model as a continuous time limit empirical analysis on s p500 index options shows that the out of sample valuation errors from the single lag version of the garch model are substantially lower than the ad hoc black scholes model of dumas fleming and whaley 1998 that uses a separate implied volatility for each option to fit to the smirk smile in implied volatilities the garch model remains superior even though the parameters of the garch model are held constant and volatility is filtered from the history of asset prices while the ad hoc black scholes model is updated every period the improvement is largely due to the ability of the garch model to simultaneously capture the correlation of volatility with spot returns and the path dependence in volatility article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

information technology and the use of energy abstract this paper assesses the potential impact of information technology on energy use in advanced economies irrespective of energy price movements information technology is expected to raise the energy efficiency of economic activity through its direct application to reducing energy consumption in products and processes and through the productivity improvements and structural changes it initiates which will not involve substantial increases in energy use economic growth will thus be less tied dynamically to the expansion of energy supply and demand than in previous phases of industrialization while overall energy demand may not rise strongly information technology will however tend to increase electricity s importance in the economy

an exact bond option formula this paper derives a closed form solution for european options on pure discount bonds assuming a mean reverting gaussian interest rate model as in vasicek 8 the formula is extended to european options on discount bond portfolios

unbiased estimation of the black scholes formula abstract the black scholes model gives the price of an option as a function of the true variance rate of the underlying stock and other parameters because the true variance rate is unobservable an estimate of the variance rate is used in empirical tests but because the black scholes formula is non linear in the variance option price estimates using an estimated variance are biased even if the variance estimate itself is unbiased this paper develops an unbiased estimator of the black scholes formula from a taylor series expansion of the formula and the properties of the pdf of the estimated variance

pricing interest rate options in a two factor cox ingersoll ross model of the term structure solutions are presented for prices on interest rate options in a two factor version of the cox ingersoll ross model of the term structure specific solutions are developed for caps on floating interest rates and for european options on discount bonds coupon bonds coupon bond futures and euro dollar futures the solutions for the options are expressed as multivariate integrals and we show how to reduce the calculations to univariate numerical integrations which can be calculated very quickly the two factor model provides more flexibility in fitting observed term structures and the fixed parameters of the model can be set to capture the variability of the term structure over time article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

information effects in transport with stochastic capacity and uncertainty costs in this paper the impact of information provision to travelers using a model based on a stochastic equilibrium concept is analyzed a new analytical framework is proposed by including a specific term related to the costs of travel time uncertainty per se into the generalized cost function different driver information models are analyzed to assess the efficiency improving features of driver information systems compared with the optimal first best policy of road pricing the results reveal that the potential of driver information systems as an efficiency improving policy instrument are underestimated if costs of uncertainty are ignored coauthors are erik t verhoef peter nijkamp and piet rietveld copyright 1998 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

simulated likelihood estimation of diffusions with an application to exchange rate dynamics in incomplete markets abstract we present an econometric method for estimating the parameters of a diffusion model from discretely sampled data the estimator is transparent adaptive and inherits the asymptotic properties of the generally unattainable maximum likelihood estimator we use this method to estimate a new continuous time model of the joint dynamics of interest rates in two countries and the exchange rate between the two currencies the model allows financial markets to be incomplete and specifies the degree of incompleteness as a stochastic process our empirical results offer several new insights into the dynamics of exchange rates

the incidence of congestion tolls on urban highways abstract the incidence of an optimal short run congestion toll is investigated using an equilibrium model of modal choice and congestion on a highway corridor served by express bus transit it is argued that for an externality tax the usual equi revenue analysis of burdens is inappropriate instead welfare effects are computed under three alternative assumptions about redistribution of toll revenues in almost all cases the net result is benefits for all income groups it is concluded that congestion tolls should not be rejected on grounds of income distribution but that an explicit package of tolls and revenue uses is probably a political prerequisite for adoption

statistical tests of contingent claims asset pricing models abstract a new methodology for statistically testing contingent claims asset pricing models based on asymptotic statistical theory is proposed it is introduced in the context of the black scholes option pricing model for which some illustrative estimation inference and simulation results are also presented the proposed methodology is then extended to arbitrary contingent claims by first considering the estimation problem for general ito processes and then deriving the asymptotic distribution of a general contingent claim which depends upon such ito processes