on the impacts of oil price fluctuations on european equity markets volatility spillover and hedging effectiveness the objective of this paper is to investigate the volatility spillovers between oil and stock markets in europe as not all industries are expected to be equally affected by oil price changes we conduct our study at both the aggregate as well as sector levels empirically we make use of a recently developed var garch approach which allows for transmissions in volatilities in addition we analyze the optimal weights and hedge ratios for oil stock portfolio holdings based on our results on the whole our findings show significant volatility spillovers between oil price and sector stock returns and suggest that a better understanding of those links is crucial for portfolio management in the presence of oil price risk

implications of economic interdependence for endogenous wage indexation decisions this paper shows how economic interdependence affects the indexation decisions of atomistic wage setters in an environment in which monetary authorities do not observe stochastic disturbances before making their policy choices if stochastic disturbances are common across countries interdependence has no effect on equilibrium indexation choices in identical countries however if disturbances are country specific numerical simulations show that interdependence is likely to reduce equilibrium indexation choices relative to a small open economy we also show that indexation choices may be either strategic complements or strategic substitutes but that strategic complementarity becomes more likely as the degree of interdependence rises

precautionary saving in the small and in the large the theory of precautionary saving is shown to be isomorphic to the arrow pratt theory of risk aversion making possible the application of a large body of knowledge about risk aversion to precautionary saving and more generally to the theory of optimal choice under risk in particular a measure of the strength of the precautionary saving motive analogous to the arrow pratt measure of risk aversion is used to establish a number of new propositions about precautionary saving and to give a new interpretation of the dreze modigliani substitution effect copyright 1990 by the econometric society

proper risk aversion on introduit et on etudie une condition comportementale significative sur les fonctions d utilite pour les richesses qui signifie qu une loterie indesirable ne peut jamais etre rendue desirable par la presence d une loterie indesirable independante

standard risk aversion this paper introduces the concept of standard risk aversion a von neumann morgenstern utility function has standard risk aversion if any risk makes a small reduction in wealth more painful in the sense of an increased reduction in expected utility also makes any undesirable independent risk more painful it is shown that given monotonicity and concavity the combination of decreasing absolute risk aversion and decreasing absolute prudence is necessary and sufficient for standard risk aversion standard risk aversion is shown to imply not only pratt and zeckhauser s proper risk aversion individually undesirable independent risks always being jointly undesirable but also that being forced to face an undesirable risk reduces the optimal investment in a risky security with and independent return similar results are established for the effect of broad class of increases in one risk on the desirability of or optimal investment in a second independent risk

the credibility of policy announcements greek evidence this paper by using error correction ec methodology along with chow stability tests examines whether three cases of policy announcements in greece over the 1975 1995 period have been considered credible or not by the public focusing on the phillips curve trade off the empirical findings reveal that two out of three policy announcements are characterized as credible by private agents

oil price volatility and stock price fluctuations in an emerging market evidence from south korea abstract how important are oil price fluctuations and oil price volatility on equity market performance what are the policy implications if volatility turns out to be significant we assess this issue in an economics finance nexus for korea using a vec model including interest rates economic activity real stock returns real oil prices and oil price volatility our main aim is to capture the effects of crude oil prices on the korean economy thoroughly covering the period of the asian financial crisis of 1997 which heavily affected the country and the oil price hikes in the early 1990s after the gulf war south korea was the country most hit by the financial crisis together with indonesia and thailand results indicate the dominance of oil price volatility on real stock returns and emphasize how this has increased over time oil price volatility can have profound effect on the time horizon of investment and firms need adjust their risk management procedures accordingly this increase in dependency has been found in other net oil importing emerging equity markets we test the relationship between oil price movements and economic activity by using modern time series techniques in a cointegrating framework we expand the standard error correction model by examining the dynamics of out of sample causality through the generalized variance decomposition and impulse response function techniques the evidence from persistence profiles also gives important guidelines based on how fast the entire system adjusts back to equilibrium in addition we find the cointegrating relationship to be stable and find that the linear error correction model to be more favorable than an asymmetric 2 period markov switching model

optimal insurance in incomplete markets this paper examines the theory of optimal insurance purchasing in the presence of uninsurable background risk existing theorems concerning the optimal level of insurance and the optimal form of an insurance contract are shown to hold only under restricted market and risk assumptions in particular conditions sufficient for the optimality of full coverage or sufficient for the optimality of deductible policies depend on the correlation between insurable and uninsurable risks these results may provide a partial explanation why existing theory is often contradicted by observable behavior

inflation and reputation in many macroeconomic models with rational expectations optimal policy is time inconsistent and therefore announced policy may not be credible this paper models the government s credibility explicitly using kreps and wilson s analysis time consistent optimal government policy emerges as a sequential equilibrium in a repeated game this policy is at least as good as the inconsistent optimal policy and dominates the consistent policy when reputational effects are ignored thus the analysis resolves the problem of specifying a credible optimal policy in such models the results show why attempts to disinflate may lead to recession even with perfectly flexible prices this abstract was borrowed from another version of this item

co movement of international crude oil price and indian stock market evidences from nonlinear cointegration tests this article explores nonlinear cointegration between international crude oil price and indian stock market in a multivariate framework for the period january 2 2003 to july 29 2011 by threshold cointegration tests which determine the structural breaks endogenously the tests reject any long run equilibrium relationship among the variables for the entire data span in order to get better insight threshold cointegration tests have been applied on three sub phases prior phase i and post phase iii to most volatile phase phase ii spanning from july 2 2007 to dec 29 2008 the tests suggest existence of cointegration in phase iii only toda yamamoto version of granger causality tests reveals that movements of international crude oil price have impact on indian stock market in phases ii and iii with no feedback effect the findings also suggest that global crude oil price is exogenously determined

a time varying copula approach to oil and stock market dependence the case of transition economies abstract we employ the time varying copula approach to investigate the conditional dependence between the brent crude oil price and stock markets in the central and eastern european cee transition economies our results show evidence of a positive dependence between the oil and the stock markets of the six cee countries which is indicative of a contagion between those markets regardless of the changes in the oil price or the cee stock index moreover the dependence patterns in both the center and left tails of the return distributions change over time particularly during the heart of the financial crisis and are best described by the survival gumbel copulas the empirical evidence also suggests that the lower tail dependence is much stronger than that of the upper tail highlighting the importance of contagion during severe contractionary business cycles among the sample markets poland is shown to be particularly sensitive in this regard while hungary and slovenia are the least sensitive

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

index investment and financialization of commodities the authors found that concurrent with the rapidly growing index investment in commodity markets since the early 2000s prices of non energy commodity futures in the united states have become incr

volatility spillovers between oil prices and stock sector returns implications for portfolio management abstract in this article we take a recent generalized var garch approach to examine the extent of volatility transmission between oil and stock markets in europe and the united states at the sector level the empirical model is advantageous in that it typically allows simultaneous shock transmission in the conditional returns and volatilities insofar as volatility transmission across oil and stock sector markets is a crucial element for portfolio designs and risk management we also analyze the optimal weights and hedge ratios for oil stock portfolio holdings with respect to the results our findings point to the existence of significant volatility spillover between oil and sector stock returns however the spillover is usually unidirectional from oil markets to stock markets in europe but bidirectional in the united states our back testing procedures finally suggest that taking the cross market volatility spillovers estimated from the var garch models often leads to diversification benefits and hedging effectiveness better than those of commonly used multivariate volatility models such as the ccc garch of bollerslev 1990 the diagonal bekk garch of engle and kroner 1995 and the dcc garch of engle 2002

forty years of oil price fluctuations why the price of oil may still surprise us it has been forty years since the oil crisis of 1973 74 this crisis has been one of the defining economic events of the 1970s and has shaped how many economists think about oil price shocks in recent years a large literature on the economic determinants of oil price fluctuations has emerged drawing on this literature we first provide an overview of the causes of all major oil price fluctuations between 1973 and 2014 we then discuss why oil price fluctuations remain difficult to predict despite economists improved understanding of oil markets unexpected oil price fluctuations are commonly referred to as oil price shocks we document that in practice consumers policymakers financial market participants and economists may have different oil price expectations and that what may be surprising to some need not be equally surprising to others

centralized wage setting and monetary policy in a reputational equilibrium this paper analyzes a repeated game between the central bank and a centralized trade union the central bank would be better off if it could commit to a noninflationary strategy when this commitment is not enforceable a noninflationary equilibrium can still be sustained by a reputational mechanism if the central bank has superior information about its own objective function the qualitative properties of this reputational equilibrium are shown to differ from the cases considered in the existing literature where the central bank was modeled as playing a game against competitive labor markets copyright 1988 by ohio state university press

an analysis of portfolio selection with background risk abstract this paper investigates the impact of background risk on an investor s portfolio choice in a mean variance framework and analyzes the properties of efficient portfolios as well as the investor s hedging behaviour in the presence of background risk our model implies that the efficient portfolio with background risk can be separated into two independent components the traditional mean variance efficient portfolio and a self financing component constructed to hedge against background risk our analysis also shows that the presence of background risk shifts the efficient frontier of financial assets to the right with no changes in its shape moreover both the composition of the hedge portfolio and the location of the efficient frontier are greatly affected by a number of background risk factors including the proportion of background assets in total wealth and the correlation between background risk and financial risk

multiplicative background risk although there has been much attention in recent years on the effects of additive background risks the same is not true for its multiplicative counterpart we consider random wealth of the multiplicative form xy where x and y are statistically independent random variables we assume that x is endogenous to the economic agent but that y is an exogenous and nontradable background risk that represents a type of market incompleteness our main focus is on how the presence of the multiplicative background risk y affects risk taking behavior for decisions on the choice of x we extend the results of gollier and pratt 1996 to characterize conditions on preferences that lead to more cautious behavior

dynamic and directional network connectedness of crude oil and currencies evidence from implied volatility abstract we explore the dynamic and directional network connectedness between implied volatility measures of crude oil and the exchange rate of nine major currency pairs for a sample period from may 2007 to december 2016 we use the dynamic cholesky factor vector autoregression variance decomposition method to ascertain the net directional spillovers and to determine the direction of the transmission of shocks we employed the network graph connectedness method across a few select events characterized by the crude oil price volatility of 2008 09 and 2014 16 we found that the crude oil market has a dominant impact on the total connectedness of the crude oil currency implied volatility relationship suggesting that crude oil affects currencies more than currencies affect crude oil for the time frame of 2007 16 however during the crude oil crisis periods the dynamics are reversed with crude having more of an effect additionally the pairwise directional network connectedness between the currency pairs reveals that eurusd is more sensitive to the crude price fluctuation than other major currency pairs and is one major currency that passes idiosyncratic shocks to other currency pairs

cross hedging under multiplicative basis risk cross hedging price risk in an incomplete financial market creates basis risk we propose a new way of modeling basis risk where price risk and basis risk are combined in a multiplicative way under this specification positive prudence is a necessary and sufficient condition for underhedging in an unbiased market using the example of cross hedging jet fuel price risk with crude oil futures we show that the new specification is superior in describing the price series and that optimal cross hedges differ significantly from those derived under the traditional additive cross hedging model

a lagrange multiplier test for causality in variance we adapt the lagrange multiplier lm principle to test for noncausality in variance of financial returns the new test is compared with a portmanteau statistic cheung y w ng l k 1996 a causality in variance test and its application to financial market prices journal of econometrics 72 33 48 a monte carlo study reveals superior power of the lm test

time varying volatility spillover between chinese fuel oil and stock index futures markets based on a dcc garch model with a semi nonparametric approach abstract this paper reveals some new evidence on the volatility spillover between fuel oil and stock index futures markets in china by considering its time variant feature time varying effect is specified by the legendre polynomials in a dcc garch model moreover the semi nonparametric snp approach accounting for marginal excess kurtosis and asymmetry is applied we find different time evolving patterns of volatility spillover across multiple periods due to the structural breaks the direction of mean volatility spillover is found to be bilateral moreover the strength of mean volatility spillover shows that the effect from stock index to fuel oil futures is much stronger than the other way around this implies that the stock index futures market plays a leading role in information processing these findings have important implications for the fuel oil stakeholders as well as risk management

convex and decreasing absolute risk aversion is proper proper risk aversion a pivotal concept in the study of behavioral conditions on utility functions states that an undesirable risk can never be made desirable by the presence of an independent risk it is well known that standard risk aversion is sufficient for this concept we show in this short article that convex and decreasing absolute risk aversion is an alternative sufficient condition

oil and stock market volatility a multivariate stochastic volatility perspective abstract this paper models the volatility of stock and oil futures markets using the multivariate stochastic volatility structure in an attempt to extract information intertwined in both markets for risk prediction it offers four major findings first the stock and oil futures prices are inter related their correlation follows a time varying dynamic process and tends to increase when the markets are more volatile second conditioned on the past information the volatility in each market is very persistent i e it varies in a predictable manner third there is inter market dependence in volatility innovations that hit either market can affect the volatility in the other market in other words conditioned on the persistence and the past volatility in their respective markets the past volatility of the stock oil futures market also has predictive power over the future volatility of the oil futures stock market finally the model produces more accurate value at risk estimates than other benchmarks commonly used in the financial industry

dynamics of oil price precious metal prices and exchange rate this study examines the co movements and information transmission among the spot prices of four precious metals gold silver platinum and palladium oil price and the us dollar euro exchange rate we find evidence of a weak long run equilibrium relationship but strong feedbacks in the short run the spot precious metal markets respond significantly but temporarily to a shock in any of the prices of the other metal prices and the exchange rate furthermore we discover some evidence of market overreactions in the palladium and platinum cases as well as in the exchange rate market in conclusion whether there are overreactions and re adjustments or not investors may diversify at least a portion of the risk away by investing in precious metals oil and the euro policy implications are provided

the directional volatility connectedness between crude oil and equity markets new evidence from implied volatility indexes in this paper we use a set of newly introduced implied volatility indexes to investigate the directional connectedness between oil and equities in eleven major stock exchanges around the globe from 2008 to 2015 the inference on the oil equity implied volatility relationships depends on diebold and yilmaz 2012 2014 2015 who proposed a set of directional measures that enable the dynamic and directional characterization of the relationships among financial variables we find uniform results across the sample countries indicating that the connectedness between oil and equity is established by the bi directional information spillovers between the two markets however we find that the bulk of association is largely dominated by the transmissions from the oil market to equity markets and not the other way around the pattern of transmissions is varying over the sample period however most of the linkages between oil and equities are established from the mid of 2009 to the mid of 2012 which is a period that witnessed the start of global recovery

oil price shocks and stock market returns evidence for some european countries abstract in this paper we examine the impact of oil price shocks on stock returns in 12 oil importing european economies using vector autoregressive var and vector error correction models vecm for the period 1973 02 2011 12 we propose an alternative oil price shock specification that takes into account both world oil production and world oil prices in order to disentangle oil supply and oil demand shocks we find that the response of the european real stock returns to an oil price shock may differ greatly depending on the underlying causes of the oil price change the results suggest the existence of a negative and significant impact of oil price changes on most european stock market returns furthermore we find that stock market returns are mostly driven by oil supply shocks

quantifying the speculative component in the real price of oil the role of global oil inventories abstract one of the central questions of policy interest in recent years has been how many dollars of the inflation adjusted price of oil must be attributed to speculative demand for oil stocks at each point in time we develop statistical tools that allow us to address this question and we use these tools to explore how the use of two alternative proxies for global crude oil inventories affects the empirical evidence for speculation notwithstanding some differences overall these inventory proxies yield similar results while there is evidence of speculative demand raising the price in mid 2008 by between 5 and 14 dollars depending on the inventory specification there is no evidence of speculative demand pressures between early 2003 and early 2008 as a result current policy efforts aimed at tightening the regulation of oil derivatives markets cannot be expected to lower the real price of oil in the physical market we also provide evidence that the libyan crisis in 2011 shifted expectations in oil markets resulting in a price increase of between 3 and 13 dollars depending on the inventory specification with regard to tensions with iran in 2012 the implied price premium ranges from 0 to 9 dollars

shift contagion vulnerability in the mena stock markets as part of a broader financial development reform agenda the middle east and north africa mena countries have successfully expanded and revitalised their stock markets over the last decade whereas previous contributions have investigated efficiency international integration and portfolio diversification opportunities very little is known about these markets vulnerability to external financial crises in this paper we investigate shift contagion to the mena region using a comprehensive battery of econometric tests for a number of different crises episodes the 1997 asian crisis the 1998 russian virus and its brazilian sequel the 2000 turkish collapse the 9 11 turmoil the 2001 argentinean crisis the 2002 enron worldcom scandal and the 2007 09 global financial crisis we found that turkey israel and jordan were the most vulnerable markets over the 1997 2009 period followed by tunisia morocco egypt and lebanon our results also highlight heterogeneous but increasing levels of sensitivity to external financial shocks especially during the recent global financial crisis from a financial point of view this suggests that mena based diversification strategies may be relatively inefficient during periods of global turmoil from an economic point of view our results suggest that stock market development also involves potential destabilisation costs this issue should be acknowledged and addressed by policymakers if these countries are to ensure a smooth transition towards international financial integration

modeling volatility and correlations between emerging market stock prices and the prices of copper oil and wheat abstract increased financial integration between countries and the financialization of commodity markets are providing investors with new ways to diversify their investment portfolios this paper uses varma agarch and dcc agarch models to model volatilities and conditional correlations between emerging market stock prices copper prices oil prices and wheat prices the dynamic conditional correlation model is found to fit the data the best and used to generate dynamic conditional correlations hedge ratios and optimal portfolio weights emerging market stock prices and oil prices display leverage effects where negative residuals tend to increase the variance conditional volatility more than positive ones correlations between these assets increased considerably after 2008 and have yet to return to their pre 2008 values on average oil provides the cheapest hedge for emerging market stock prices while copper is the most expensive but given the variability in the hedge ratios one should probably not put too much emphasis on average hedge ratios

relationships between oil price shocks and stock market an empirical analysis from china this paper investigates the interactive relationships between oil price shocks and chinese stock market using multivariate vector auto regression oil price shocks do not show statistically significant impact on the real stock returns of most chinese stock market indices except for manufacturing index and some oil companies some important oil price shocks depress oil company stock prices increase in oil volatility may increase the speculations in mining index and petrochemicals index which raise their stock returns both the world oil price shocks and china oil price shocks can explain much more than interest rates for manufacturing index

crude oil prices and sectoral stock returns in jordan around the arab uprisings of 2010 abstract in this paper we test for mean and variance causality between world oil prices and sectoral equity returns in jordan before and after the arab uprisings that started in 2010 the testing methodology is based on the sample of cross correlation functions that are computed from the standardized residuals of a garch process our results show that the influence is not uniform across the equity sectors the oil return shocks significantly impact the financials and the services sectors while its effect is insignificant on the industrials sector this result is more pronounced in the period that follows the arab uprisings in terms of risk transfer we find that oil is a negligible risk factor however there is still a significant evidence of risk transmission to the industrials sector particularly during the arab uprisings period these results represent a unique information transmission mechanism that is useful for risk management and portfolio diversification

risk spillover of international crude oil to china s firms evidence from granger causality across quantile abstract this paper investigates the extreme risk spillover of international crude oil to stock returns for 529 firms listed on the a share market of the shanghai stock exchange we apply a kernel based nonparametric method to test quantile on quantile granger causality from crude oil to firm returns from the perspective of firm level analysis the findings are outlined as follows first our empirical results provide strong evidence to suggest the asymmetry in the linkage of extreme movements from crude oil to firm returns that is the case of positive risk spillovers are more severe than the case of negative risk spillovers in particular the down to down risk spillover is the most serious case this phenomenon unravels the strong driving force of economic cycles second risk transmission from oil price shocks to firm returns depends on the firm s industry features in addition to the usual focus on inter industry difference we also note the within industry heterogeneity third we confirm that china s refined oil pricing reform of march 27 2013 has had intensifying effects on the negative spillovers from oil prices to firms for investors we emphasize not only the awareness of the predictive power between extreme risks from international crude oil to china s firms but also the existence of heterogeneity in these predictive abilities across firms

oil prices exchange rates and emerging stock markets abstract while two different streams of literature exist investigating 1 the relationship between oil prices and emerging market stock prices and 2 the relationship between oil prices and exchange rates relatively little is known about the dynamic relationship between oil prices exchange rates and emerging market stock prices this paper proposes and estimates a structural vector autoregression model to investigate the dynamic relationship between these variables impulse responses are calculated in two ways standard and the recently developed projection based methods the model supports stylized facts in particular positive shocks to oil prices tend to depress emerging market stock prices and us dollar exchange rates in the short run the model also captures stylized facts regarding movements in oil prices a positive oil production shock lowers oil prices while a positive shock to real economic activity increases oil prices there is also evidence that increases in emerging market stock prices increase oil prices

the wage price spiral this paper rehabilitates the old wage price spiral it shows that after an increase in aggregate demand the process of adjustment of nominal prices and nominal wages results from attempts by workers to maintain or increase their real wage and by firms to maintain or increase their markups of prices over wages under continuous price and wage setting the process of adjustment would be instantaneous under staggering of price and wage decisions the adjustment takes time the more inflexible real wages and markups are to shifts in demand the higher is the degree of price level inertia and the longer lasting are the effects of aggregate demand on output

daily seasonality in crude oil returns and volatilities abstract in this article we test for the existence of daily seasonality in returns and volatilities of crude oil using a dummy augmented garch specification for the period from may 1987 to october 2013 our key findings are as follows i volatilities on mondays are significantly higher than on all other weekdays providing the important insight that seasonal effects should be considered when forecasting crude oil volatility ii returns on the other hand tend to be lower on mondays than on other weekdays suggesting profitable investment strategies based on this seasonal pattern in fact the analysis of a simple long short trading rule based on the monday effect provides some evidence that it can outperform a passive buy and hold approach however it cannot do so to an extent that is statistically significant iii our seasonality results are fairly robust to the choice of other frequently used garch model variants like garch m tgarch and cgarch

policy credibility and inflation in a wage setting game this paper combines the conventional monetary policy game with a wage setting game among several non cooperating wage setters each with some monopoly power the inflationary bias in market economies is explained in terms of the wage competition bias this bias does not disappear even when the central bank communicates its policy goals precisely and credibly in a policy game with several non cooperative monopolistic wage setters and a central bank if discretionary policy is interpreted as wage setters being stackelberg leaders relative to the central bank a discretionary policy leads to both higher inflation and lower output

de financialization of commodities evidence from stock crude oil and natural gas markets abstract in order to investigate whether the crude oil and natural gas market volatility is influenced by the volatility in the stock market or whether these different variables move all together we introduce the volatility threshold dynamic conditional correlations vt dcc approach to investigate the spillover effect of stock market volatility index vix vstoxx on crude oil and natural gas markets during 1999 2015 and make the correlation dynamics dependent on conditional variance values through a threshold grid search algorithm by detecting one endogenous break point in the raw series we identify two clusters one in 2008 and another in 2014 due to the financial crisis and the structural low oil prices linked to changing fundamentals respectively also the u s henry hub gas seems to be associated with the stock market volatility indexes contrary to the european nbp gas which is linked to the brent besides regarding the volatility behaviors of our series the four energy variables violate their thresholds at similar moments and the stock market vix and vstoxx exhibit logically similarities co movements are detectable as well between the vix and crude oil series when investigating the volatility extracted from the garch model in addition the block dcc estimates provide ample evidence of similarities in the correlation dynamics between the crude oil and stock volatility series it should be noted that the modeling framework proposed in this paper represents a useful tool for the study of cross market contagion

preservation of more risk averse under expectations abstract the preservation of risk aversion properties of utility functions under expectation operations is of interest in the study of derived utility functions in sequential decision problems and in problems with multiple contemporaneous sources of uncertainty the purpose of this note is to present sufficient conditions for the pratt relation more risk averse to be preserved under expectations

oil price shocks and stock markets in the u s and 13 european countries abstract oil price shocks have a statistically significant impact on real stock returns contemporaneously and or within the following month in the u s and 13 european countries over 1986 1 2005 12 norway as an oil exporter shows a statistically significantly positive response of real stock returns to an oil price increase the median result from variance decomposition analysis is that oil price shocks account for a statistically significant 6 of the volatility in real stock returns for many european countries but not for the u s increased volatility of oil prices significantly depresses real stock returns the contribution of oil price shocks to variability in real stock returns in the u s and most other countries is greater than that of interest rate an increase in real oil price is associated with a significant increase in the short term interest rate in the u s and eight out of 13 european countries within one or two months counter to findings for the u s and for norway there is little evidence of asymmetric effects on real stock returns of positive and negative oil price shocks for oil importing european countries

income risk borrowing constraints and portfolio choice economic theory suggests that uninsurable income risk and the expectation of future borrowing constraints can reduce the share of risky assets in a household s portfolio if the utility function exhibits decreasing absolute risk aversion and decreasing prudence an individual will reduce his exposure to rate of return risks when confronted with other independent risks if there are transaction costs the expectation of future borrowing constraints should induce individuals to keep a lower proportion of their wealth in the form of illiquid and risky assets the authors find support for these propositions in a cross section of italian households copyright 1996 by american economic association

the sales agent problem effort leisure allocation under performance pay as behavior towards risk the choice between safe and risky assets represents behavior towards risk more risk averse investors buy more safe assets we develop and test a general model that applies this intuition to the time allocation between risky effort and risk free leisure under linear incentives when risk increases with effort risk averse agents choose less effort but when risk is independent of effort effort choice is unaffected by risk preferences in many incentive contracts income risk is multiplicative with rather than additive to effort sales commissions being one example in such cases lower effort by the risk averse is a hitherto undocumented behavior towards risk jel c91 m52 j33

the newsvendor problem under multiplicative background risk this note studies the single period newsvendor problem when the newsvendor faces a multiplicative neutral independent background risk in an expected utility framework it is shown that multiplicative risk vulnerability is a sufficient condition to guarantee a decrease in the optimal order a weaker sufficient condition which has more interpretability is also provided and discussed this result sheds light on situations where exchange tax or inflation rates risks which apply multiplicatively to the final wealth are at work

risk taking with additive and multiplicative background risks abstract we examine the effects of background risks on optimal portfolio choice examples of background risks include uncertain labor income uncertainty about the terminal value of fixed assets such as housing and uncertainty about future tax liabilities while some of these risks are additive and have been amply studied others are multiplicative in nature and have received far less attention the simultaneous effect of both additive and multiplicative risks has hitherto not received attention and can explain some paradoxical choice behavior we rationalize such behavior and show how background risks might lead to seemingly u shaped relative risk aversion for a representative investor

analyzing volatility spillovers and hedging between oil and stock markets evidence from wavelet analysis abstract this paper examines the linkage of crude oil market wti and stock markets of the g 7 countries we study the mean and volatility spillovers of oil and stock market prices over various time horizons we propose a new approach incorporating both multivariate garch models and wavelet analysis wavelet based mgarch approach we combine a bivariate garch bekk model with wavelet multiresolution analysis in order to capture the multiscale features of mean and volatility spillovers between time series for optimal portfolio allocation decisions we analyze the multiscale behavior of hedge ratio empirical results show strong evidence of significant volatility spillovers between oil and stock markets as well as time varying correlations for various market pairs however results of wavelet coherence indicate that in most the wti market was leading in addition it is stated that the decomposed volatility spillovers permit investors to adapt their hedging strategies

monopolistic competition and the effects of aggregate demand how important is monopolistic competition to an understanding of the effects of aggregate demand on output we ask the question at three levels can monopolistic competition by itself explain why aggregate demand movements affect output can it together with other imperfections generate effects of aggregate demand in a way that perfect competition cannot if so can it give an accurate account of the response of the economy to aggregate demand movements the answers are no yes and yes

production decisions under joint price and production uncertainty abstract while production decisions in the presence of price uncertainty have been extensively studied this is not so for the case in which the level of production is itself uncertain in this paper we provide a decision analysis under multiplicative production uncertainty both with and without price uncertainty we depict equilibrium and obtain comparative statics results with the aid of a diagram based on the difference between expected price and marginal cost comparative statics results are obtained for the model with production uncertainty alone and also for simultaneous price and production uncertainty including two special cases we first derive results based on the arrow pratt coefficients of risk aversion and then supplement these with the ross measure of relative risk aversion since this proves useful in the presence of multiple sources of uncertainty we find that increases in risk both price and production or input prices reduce expected output however expected output supply is an increasing function of expected price only for low levels of risk aversion and in general the relationship is ambiguous

dynamic spillovers between oil and stock markets in the gulf cooperation council countries this article exploits a new spillover directional measure proposed by diebold and yilmaz 2009 2012 to investigate the dynamic spillover of return and volatility between oil and equities in the gulf cooperation council countries during the period 2004 to 2012 our results indicate that return and volatility transmissions are bi directional albeit asymmetric in particular the oil market gives other markets more than it receives in terms of both returns and volatilities these trends were more pronounced in the aftermath of the global financial crisis in 2008 as the net contribution of oil has intensified after a burst during the crisis the empirical evidence from the sample is consistent with a system in which oil is playing the dominant role in the information transmission mechanism between oil and equities in the gcc countries

crude oil and stock markets stability instability and bubbles abstract we analyze the long run relationship between the world price of crude oil and international stock markets over 1971 1 2008 3 using a cointegrated vector error correction model with additional regressors allowing for endogenously identified breaks in the cointegrating and error correction matrices we find evidence for breaks after 1980 5 1988 1 and 1999 9 there is a clear long run relationship between these series for six oecd countries for 1971 1 1980 5 and 1988 2 1999 9 suggesting that stock market indices respond negatively to increases in the oil price in the long run during 1980 6 1988 1 we find relationships that are not statistically significantly different from either zero or from the relationships of the previous period the expected negative long run relationship appears to disintegrate after 1999 9 this finding supports a conjecture of change in the relationship between real oil price and real stock prices in the last decade compared to earlier years which may suggest the presence of several stock market bubbles and or oil price bubbles since the turn of the century

international portfolio selection with exchange rate risk a behavioural portfolio theory perspective abstract this paper analyzes international portfolio selection with exchange rate risk based on behavioural portfolio theory bpt we characterize the conditions under which the bpt problem with a single foreign market has an optimal solution and show that the optimal portfolio contains the traditional mean variance efficient portfolio without consideration of exchange rate risk and an uncorrelated component constructed to hedge against exchange rate risk we illustrate that the optimal portfolio must be mean variance efficient with exchange rate risk while the same is not true from the perspective of local investors unless certain conditions are satisfied we further establish that international portfolio selection in the bpt with multiple foreign markets consists of two sequential decisions investors first select the optimal bpt portfolio in each market overlooking covariances among markets and then allocate funds across markets according to a specific rule to achieve mean variance efficiency or to minimize the loss in efficiency

oil prices stock markets and portfolio investment evidence from sector analysis in europe over the last decade this article extends the understanding of oil stock market relationships over the last turbulent decade unlike previous empirical investigations which have largely focused on broad based market indices national and or regional indices we examine short term linkages in the aggregate as well as sector by sector levels in europe using different econometric techniques our main findings suggest that the reactions of stock returns to oil price changes differ greatly depending on the activity sector in the out of sample analysis we show that introducing oil asset into a diversified portfolio of stocks allows to significantly improve its risk return characteristics

commodity prices convenience yields and inflation abstract this paper provides evidence that the two leading principal components in a panel of 23 commodity convenience yields have statistically and quantitatively important predictive power for inflation even after controlling for unemployment gap and oil prices the results hold up in out of sample forecasts across forecast horizons and across g7 countries the convenience yields also explain commodity prices and can be seen as informational variables about future economic conditions as conveyed by the futures markets a bootstrap procedure for conducting inference when the principal components are used as regressors is also proposed

some stronger measures of risk aversion in the small and the large with applications the arrow pratt measures of risk aversion for von neumann morgenstern utility functions have become workhorses for analyzing problems in the microeconomics of uncertainty they have been used to characterize the qualitative properties of demand in insurance and asset markets to examine the properties of risk taking in taxation models and to study the interaction between risk and life cycle savings problems to name just a few applications equally importantly they have generated the linear risk tolerance class of utility functions which has provided canonical examples in such diverse areas as portfolio theory and the theory of teams despite these successes there have been a number of areas for which the results have been weaker than hoped it is natural to use the risk aversion measures to compare the behavior of individuals in risky choice situations for example consider the individual portfolio choice problem in a two asset world with a riskless asset and a risky asset if individual a has a uniformly higher arrow pratt coefficient of risk aversion than individual b then b will always choose a portfolio combination with more wealth invested in the risky asset but suppose that both assets are risky now there is no obvious sense in which the more risk averse individual can be said to hold a less risky portfolio but it seems strange that such a simple alteration should destroy the analytics which support the basic intuition similarly consider the basic insurance problem if one individual a is more risk averse than another b in the arrow pratt sense it follows that a will pay a larger premium to insure against a random loss than will b typically though an individual evaluates partial rather than total insurance that is only some gambles can be insured against and others must be retained in this case even when the gambles which are retained are independent from those which are insured it is no longer true that the individual whose arrow pratt measure of risk aversion is higher will pay a larger insurance premium the situation is no better when we consider comparative statics exercises for a single individual decreasing absolute risk aversion in the sense of arrow and

compensation incentives and the duality of risk aversion and riskiness the common folklore that giving options to agents will make them more willing to take risks is false in fact no incentive schedule will make all expected utility maximizers more or less risk averse this paper finds simple intuitive necessary and sufficient conditions under which incentive schedules make agents more or less risk averse the paper uses these to examine the incentive effects of some common structures such as puts and calls and it briefly explores the duality between a fee schedule that makes an agent more or less risk averse and gambles that increase or decrease risk with the growing interest in executive compensation and agency problems

decreasing relative risk aversion and tests of risk sharing the relative risk aversion rra coefficient of a household whose consumption is close to the subsistence level may be very high for example if consumption is exactly at the subsistence level the household may not be willing to bear any risk if this is the case then the rra coefficient must be a decreasing function of wealth for poor households therefore we should allow the possibility of decreasing rra drra in testing the full risk sharing hypothesis however existing tests in the empirical literature are derived using preferences that exhibit either increasing or constant rra even when they are applied to data containing low income households we therefore use a hyperbolic absolute risk aversion hara utility which implies increasing constant and decreasing rra as special cases to test full risk sharing hypothesis using the international food policy research institute ifpri and the international crops research institute of the semi arid tropics icrisat household level data sets we find evidence in support of the drra hypothesis along with evidence favoring full risk sharing hypothesis at the village level and evidence against the hypothesis at the inter village level when rra is restricted to be constant we replicate the previous results in the literature reject the full risk sharing hypothesis at both levels our tests however reject this restriction and favor drra in almost all cases these results suggest that it is important to allow for drra in testing the full risk sharing hypothesis when data containing low income households are investigated this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this this abstract was borrowed from another version of this item

volatility spillover between oil and agricultural commodity markets abstract this study examines volatility transmission between oil and selected agricultural commodity prices wheat corn soybeans and sugar we apply the newly developed causality in variance test and impulse response functions to daily data from 01 january 1986 to 21 march 2011 in order to identify the impact of the food price crisis the data are divided into two sub periods the pre crisis period 01 january 1986 to 31 december 2005 and the post crisis period 01 january 2006 21 march 2011 the variance causality test shows that while there is no risk transmission between oil and agricultural commodity markets in the pre crisis period oil market volatility spills on the agricultural markets with the exception of sugar in the post crisis period the impulse response analysis also indicates that a shock to oil price volatility is transmitted to agricultural markets only in the post crisis period this paper thereby shows that the dynamics of volatility transmission changes significantly following the food price crisis after the crisis risk transmission emerges as another dimension of the dynamic interrelationships between energy and agricultural markets

wage setting under different monetary regimes in an economy with large wage setters like industry unions the monetary regime affects the trade off between consumer real wages and employment and profits faced by the wage setters this paper shows that an exchange rate target including participation in a monetary union is likely to involve lower wages in the traded sector and higher wages in the non traded sector than does a price target an exchange rate target also involves higher prices on non traded goods relative to on traded goods overall welfare is likely to be higher under a price target

transmission of shocks and contagion from u s to mena equity markets the role of oil and gas markets abstract using a multifactor model augmented with oil and gas returns this paper examines contagion from the us to mena equity markets and studies the role of energy price fluctuations in amplifying the dependence between the us and mena equity markets we provide empirical evidence of a strong contagion effect originating from the us to mena equity markets the regional oil and gas factors account for the bulk of the variance of the mena equity returns and our findings suggest that the oil and gas markets play an important role in strengthening the dependence between the mena and us markets during episodes of market turmoil we discuss the policymaking importance of our results and propose a strategy to curb the adverse effects of us return shocks on mena equity markets during episodes of stress

impact of oil price change on airline s stock price and volatility evidence from china and south korea abstract generally the influence of crude oil price on the industries enterprises varies because they have different levels of reliance on crude oil for airlines the expenditure on fuel accounts for a considerable proportion of their gross costs thus airlines are unusually sensitive to changes in the crude oil price the discussion on the relationship between crude oil price and airlines will help the airlines improve their ability to cope with the crude oil price risk in addition the responses of south korean and chinese airlines in the event of a price shock that take are also very important as the airplane is a basic form of transportation in many countries this study investigates the impact of three crude oil price wti brent dubai change on the stock price and volatility of four airlines korean air asiana airlines air china and china eastern airlines using var garch bekk model the main findings are as follows there is return and volatility spillover effect between crude oil price and the stock prices of airlines the volatility spillover effect between the crude oil price and airlines stock price is more significant than the return spillover effect compared with the transportation industry the stock prices of smaller airlines of south korea and china are relatively more sensitive to the change in oil price in addition compared with korea s airlines china s airlines are influenced more by the oil price change implying that spillover effects owing to oil price are closely related to the different characteristics of the air transport markets of the two countries

risky choices and correlated background risk the analysis of a risky project should take into account not only uncertainties about the return from that project project risk but also uncertainties associated with other ongoing projects and with exogenous factors that can impact final wealth background risk the presence of background risk can change the optimal course of action with respect to a project and ignoring such risk might lead to a poor decision most work on background risk assumes that project risk and background risk are independent and are additive in their impact on wealth however independence is often unrealistic and background risk operates in a multiplicative manner in many situations we relax the independence assumption and consider a model with both additive and multiplicative background risk the optimal decisions in the correlated setting can be very different than those that would appear optimal if the correlation were ignored the impact of correlation differs in the additive and multiplicative cases with positive correlation being beneficial in some cases and negative correlation in others the analytical and numerical results indicate that in analyzing decision making problems it is very important to understand the direction and degree of dependence between project risk and background risks

oil volatility shocks and the stock markets of oil importing mena economies a tale from the financial crisis abstract the role of oil price volatility in predicting the stock market volatility of small oil importing countries that have a substantial number of investors from neighboring oil exporting countries remains unexplored to refine our basic understanding of this role this paper proposes a methodological extension of the recently developed causality in variance procedure and considers the case of lebanon and jordan these two heavy importers of oil are interesting in the sense that they are located in a region with a large number of rich oil exporting countries so their stock markets are tied to oil exporters by way of foreign investors the conditional mean and variance of returns are modeled within an armax garch framework that accommodates three salient features of the data namely autocorrelation day of the week effects and movements in international markets for comparison purposes the stock markets of morocco and tunisia are also included in the study empirical analyses highlight the dynamic effects of the global financial crisis on the volatility spillovers between oil and the stock markets of oil importing countries and provide more insights into the seemingly contradictory effects of being oil importers while having investors from oil exporting countries the main results indicate that the volatility spillover is much more apparent from the world oil market to the stock market of jordan than the other way around whereas oil volatility is not a good predictor of lebanese stock market volatility finally policy practical implications and conclusions for future research are drawn