settlement tax and non synchronous effects in the basis of u k stock index futures abstract the basis in stock index futures markets is analytically and empirically studied in this paper within a no arbitrage cost of carry framework explanatory power improved when the implications of the u k stock exchange settlement system were introduced into the modelling process and until recently with the maturity of the market evidence indicating the presence of non synchronicities between the cash and futures markets was found strong evidence for tax effects upon the basis was not found to be present in the data analysed statistically significant relationships between basis mispricing and volume and volatility were found

the internationalisation of stock markets and the abolition of u k exchange control this paper aims to assess the impact of the abolition of u k exchange control on the degre of integration of u k and overseas stock markets using cointegration techniques we find that although there is no significant increase in the correlation of short run stock market returns for the united kingdom and certain overseas markets post 1979 there does appear to be a marked increase in the degree to which these markets move together in the long run after this date there appears to be no long run gain from diversification since cointegration of two variables implies that at least one of them can be used to help forecast the other our findings also imply the inefficiency of a number of stock markets

search bioprospecting and biodiversity conservation abstract to what extent can private sector bioprospecting incentives be relied upon for the protection of biological diversity the literature contains dramatically different estimates of these incentives from trivial to quite large we resolve this controversy by isolating the fundamental source of the discrepancy and then providing empirically defensible estimates based on that analysis results demonstrate that the bioprospecting incentive is unlikely to generate much private sector conservation thus other mechanisms are likely required to preserve the public good of biodiversity

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

testing the efficiency of the canadian u s exchange market under the assumption of no risk premium the efficiency of the canadian u s exchange market for the current float is examined more extensively than previously semi strong form tests which admit the lagged spot rate as a predictor are considered in addition to the standard weak form test these stronger tests reject the joint null hypothesis of an efficient exchange market and no risk premium for the period ending in october 1976 although not for the entire period for almost every year the current spot rate provided a better forecast of the future spot rate than did the current forward rate there is now an extensive empirical literature on testing the efficiency of various foreign exchange markets see 16 for a survey yet almost all of these tests are weak form tests or tests of the bias of the forward exchange rate as a predictor of the future spot rate such tests in the canadian u s exchange market can be found in the work of porter 20 eastman 5 kaserman 10 kohihagen 11 cornell 3 and levich 14 for the canadian float of the 1950s porter 20 and kaserman 10 found that one could not reject the unbiasedness of the forward rate eastman 5 and kohlhagen 11 rejected the unbiasedness of the forward rate for the floating period although not for the subsequent fixed period but their use of overlapping contracts means that their standard errors are biased cornell 3 and levich 14 found that in terms of the root meansquared error criterion the lagged spot rate and the lagged forward rate predicted the current spot rate equally well for more recent periods this paper examines the efficiency of the canadian u s exchange market for the current float july 1970 to december 1978 in a more extensive way than it has been previously examined from the weak form test the paper proceeds to two semi strong form tests which admit the lagged spot rate as a possible predictor throughout the paper various subperiods are considered in addition to the period as a whole

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

a cointegration analysis of treasury bill yields this paper shows that yields to maturity of u s treasury bills are cointegrated and that during periods when the federal reserve specifically targeted short term interest rates the spreads between yields of different maturity define the cointegrating vectors this cointegrating relationship implies that a single nonstationary common factor underlies the time series behavior of each yield to maturity and that risk premia are stationary an error correction model that uses spreads as the error correction terms is unstable over the federal reserve s policy regime changes but a model using post 1982 data is stable and is shown to be useful for forecasting changes in yields copyright 1992 by mit press

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

bivariate garch estimation of the optimal commodity futures hedge six different commodities are examined using daily data over two futures contract periods cash and futures prices for all six commodities are found to be well described as martingales with near integrated garch innovations bivariate garch models of cash and futures prices are estimated for the same six commodities the optimal hedge ratio ohr is then calculated as a ratio of the conditional covariance between cash and futures to the conditional variance of futures the estimated ohrs reveal that the standard assumption of a time invariant ohr is inappropriate for each commodity the estimated ohr path appears non stationary which has important implications for hedging strategies

bond pricing and the term structure of interest rates a new methodology for contingent claims valuation this paper presents a unifying theory for valuing contingent claims under a stochastic term structure of interest rates the methodology based on the equivalent martingale measure technique takes as given an initial forward rate curve and a family of potential stochastic processee for its subsequent movements a no arbitrage condition restricts this family of processes yielding valuation formulae for interest rate sensitive contingent claims which do not explicitly depend on the market prices of risk examples are provided to illustrate the key results in relation to the term structure of interest rates arbitrage pricing theory has two purposes the first is to price all zero coupon default free bonds of varying maturities from a finite number of economic fundamentals called state variables the second is to price all interest rate sensitive contingent claims taking as given the prices of the zero coupon bonds this paper presents a general theory and a unifying framework for understanding arbitrage pricing theory in this context of which all existing arbitrage pricing models are special cases in particular vasicek 1977 brennan and schwartz 1979 langetieg 1980 ball and torous 1983 ho and lee 1986 schaefer and schwartz 1987 and artzner and delbaen 1988 the primary contribution of this paper however is a new methodology for solving the second problem i e the pricing of interest rate sensitive contingent claims given the prices of all zero coupon bonds the methodology is new because i it imposes its stochastic structure directly on the evolution of the forward rate curve ii it does not require an inversion of the term structure to eliminate the market prices of risk from contingent claim values and iii it has a stochastic spot rate process with multiple stochastic factors influencing the term structure the model can be used to consistently price and hedge all contingent claims american or european on the term structure and it is derived from necessary and more importantly sufficient conditions for the absence of arbitrage the arbitrage pricing models of vasicek 1977 brennan and schwartz 1979 langetieg 1980 and artzner and delbaen 1988 all require an iformerly titled bond pricing and the term structure of interest rates a new methodology

a note on exchange rate expectations and nominal interest differentials a test of the fisher hypothesis this note tests the hypothesis that nominal interest differentials between similar assets denominated in different currencies can be explained entirely by the expected change in the exchange rate over the holding period this proposition often called the fisher open hypothesis or the hypothesis of perfect asset substitutability has been a major component of recent theories of exchange rate determination and has important implications for monetary policy 1 the fisher hypothesis differs from the covered interest parity theorem enunciated by keynes 11 while covered interest parity equates the nominal interest differential between financial centers to a known premium or discount on forward foreign exchange and is thus in principle riskless fisher parity involves risk in an essential way the two conditions are equivalent only when forward exchange rates equal expected future spot rates recent theoretical work for example that of grauer litzenberger and stehle 8 kouri 12 and frankel 6 shows that this need not be the case when market participants are risk averse thus while covered interest parity must always hold exactly in an informationally efficient asset market with no transactions costs fisher parity need not nominal interest differentials may reflect risk premia in addition to expected exchange rate movements 2 it should be emphasized at the outset that the tests conducted in this paper are really joint tests of the fisher hypothesis and a weak form of foreign exchange market informational efficiency levich 14 has argued that tests of market efficiency are always joint tests involving some hypothesized structure of normal equilibrium returns below we assume informational efficiency and instead test fisher s hypothesized arbitrage condition that nominal interest differentials equal expected percentage changes in exchange rates

cointegration and market efficiency abstract recently many economists have asserted that asset prices determined in efficient asset markets cannot be cointegrated we show that there is no general equivalence between the existence of arbitrage opportunities and cointegration or for that matter a lack of cointegration whether asset prices are cointegrated is a function of the relevant model we first show a convenient way to calculate the cointegrating vector based on necessary and sufficient conditions for cointegration we then examine particular cases including exchange rates interest rates and spot and forward exchange rates and asset prices with incoem flows reinvested and not reinvested jel f31

targeting conservation investments in heterogeneous landscapes a distance function approach and application to watershed management to achieve an environmental objective at least cost decision makers must integrate information about spatially variable biophysical and economic conditions although the biophysical attributes that contribute to an environmental outcome are often known the way in which these attributes interact to produce the outcome is often unknown we introduce a nonparametric conservation targeting approach that relies on distance functions to cost efficiently allocate conservation funds we apply the approach empirically to the case of conservation contracting for water quality objectives the contract portfolios derived from the application have many desirable properties including intuitive appeal and robust performance across plausible parametric scoring measures

rational expectations and risk premia in forward markets primary metals at the london metals exchange this paper tests whether forward prices equal the traders expectations of the future spot prices at maturity under two different models of expectations formation full information rational expectations and incomplete information mechanical forecasting rule the tests are performed over the period january 1970 through september 1980 on the forward markets for the primary metals copper tin lead and zinc traded in the london metals exchange we find evidence consistent with the existence of time varying risk premia the way in which traders form expectations about future price is of great interest to economists as well as to market participants and forward prices have often been used as indicators of these otherwise unobservable expectations forward prices however include not only the expectation of future spot prices but also a component reflecting the riskiness of the contract therefore the risk premium can be defined as the difference between the forward price and the expected future spot at the maturity date of the forward contract there is a longstanding debate on the nature of this risk premium the hickskeynes view2 is that in futures markets speculators provide insurance against the risk of fluctuations in the price of the spot commodity and hedgers pay a premium for this risk transfer in the way of a forward price that is higher than the expected spot price in other words the risk premium should be positive 3 hardy 11 has suggested however that a future market is merely a casino in which speculators can participate in a legalized form of gambling for this privilege they have to pay a price in the form of a negative expected return thus resulting in a negative risk premium 4

on the intertemporal behavior of the short term rate of interest this paper examines the intertemporal behavior of the short term rate of interest in a mean reverting model vasicek s elastic random walk model using the goldfeldquandt switching regressions technique we show that the mean reverting model switched regimes three times over the sample period march 1959 to december 1985 and that two of these switches coincide with the 1979 and 1982 changes in federal reserve monetary policy on interest rates parameter estimates prove to be unstable over the sample period there is evidence of slow mean reversion over the entire sample period yet significant mean reversion emerges only in the 1979 1982 regime

the covariation of risk premiums and expected future spot exchange rates abstract eugene fama 1984 analyzed the variability and the covariation of risk premiums and expected rates of depreciation we employ three statistical techniques that do not suffer from a potential bias in fama s analysis but we nevertheless conffirms his findings in contrast to his interpretation the results are not necessarily at variance with the predictions of a theoretical model of the risk premium increases in expected rates of depreciation of the dollar relative to five foreign currencies are positively correlated with increases in the expected profitability of purchasing these currencies in the forward market and risk premiums have larger variancies than expected rates of depreciation

pricing foreign currency options under stochastic interest rates abstract in this paper we build a general framework to price contingent claims on foreign currencies using the heath et al 1987 model of the term structure closed form solutions are obtained for european options on currencies and currency futures assuming that the volatility functions determining the term structure are deterministic as such this paper provides an example of a bond price process for both the domestic and foreign economies consistent with grabbe s 1983 formulation of the same problem

arbitrage cointegration and testing the unbiasedness hypothesis in financial markets we use a no arbitrage cost of carry asset pricing model to show that the existence of coin tegration between spot and forward futures prices depends on the time series properties of the cost of carry we argue that the conditions for cointegration are more likely to hold in currency markets than in commodity markets explaining many of the empirical results in the literature we also use this model to demonstrate why the forward rate forecast error the basis and the forward premium are serially correlated and to develop econometric tests ofthe unbiasedness hypothesis sometimes called the simple efficiency hypothesis in various financial markets the unbiasedness hypothesis is so prevalent in the finance liter ature that many tests for it have been developed we examine four of the common tests and and use our cointegration results to demonstrate why each of these tests should reject the null hypothesis of unbiasedness we find strong support for our hypothesis in the existing empirical literature

market efficiency and cointegration an application to the sterling and deutschemark exchange markets abstract the assumption that the foreign exchange market is efficient that is that agents are risk neutral and use all available information rationally so that the forward exchange rate is an unbiased predictor of the future spot rate is a property often imposed in theoretical international macroeconomic models although a vast empirical literature has evolved to test market efficiency we use recent developments in the theory of cointegration to provide new methods of testing several aspects of foreign exchange market efficiency we ffind evidence inconsistent with market efficiency for both germany and the united kingdom

bureaucratic inefficiency failure to capture the efficiencies of outsourcing this paper analyzes the political economy ofoutsourcing by 16 federal bureaus during 1981 96 inan era of restricted budgets and budget balancing thepaper questions why federal bureaus did not exploitfully the efficiencies of outsourcing it proves thatfederal bureaus can achieve technical and costefficiency through outsourcing when contracts can benearly fully specified federal bureaus outsource byobtaining inputs to their production processes throughcontracts with competitive market producing units econometric results substantiate the hypothesis that institutions matter and reveal that bureausachieve varying levels of technical efficiency throughdifferent levels of outsourcing

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

benchmarking the expectations hypothesis of the interest rate term structure an analysis of cointegration vectors i test cointegration restrictions that are consistent with the expectations hypothesis of the term structure by employing the full information maximum likelihood methods developed by johansen yield curves appear to be the result of cointegration among interest rates the cointegration vectors that best describe the long term impact of interest rate levels on interest rate changes can often be written as linear combinations of interest rate spreads there is however difficulty in keeping short term yields in such a restricted cointegrated system with other interest rates short term speculative returns from long term bonds do not conform to the expectations hypothesis

tests of exchange market efficiency fragile evidence from cointegration tests abstract several recent papers have employed engle and granger 1987 cointegration tests to determine whether or not markets are efficient we use a new test for cointegration due to johansen 1988 to examine market efficiency with respect to the us dollar exchange rates for canadian japanese and west german currencies the fragile nature of the test indications suggests that cointegration methodologies cannot be relied upon to provide reliable evidence on market efficiency

floating exchange rates expectations and new information abstract this paper analyzes the relationship between forward exchange rates future spot rates and new information a stochastic model of exchange rate determination is used to formally show how unanticipated changes in the exchange rate determinants or news affect the spot rate the empirical analysis indicates that new information plays an important role in explaining the market forecasting error or difference between the spot rate and the forward rate determined in the previous period

cointegration and tests of purchasing power parity nonstationarity in the levels of spot exchange rates and domestic and foreign price indices makes the use of conventional tests of the absolute version of purchasing power parity ppp inappropriate if ppp is true inter country commodity arbitrage ensures that deviations from a linear combination of spot exchange rates and domestic and foreign price levels should be stationary under these conditions exchange rates and price levels should form a cointegrated system we find the null hypothesis of no cointegration cannot be rejected for all five countries thus violating the long run absolute version of ppp

diversity productivity and temporal stability in the economies of humans and nature abstract recent advances in ecology are of great potential relevance to economists here we present two ecological models of mechanisms of competition and coexistence and use these to derive how the primary productivity of ecosystems the amount of carbon dioxide removed from the atmosphere and stored by plants the efficiency of resource use and the spatial and temporal variability of productivity and resource use should depend on diversity we then discuss the relevance of these results to 1 ecosystem services and the economic value of diversity and 2 the functioning of any competitive system including the economy

relative and absolute scarcity of nature assessing the roles of economics and ecology for biodiversity conservation abstract our aim in this essay is to identify and analyze some of the difficulties with interdisciplinary integration of economic and ecological contributions to the study of biodiversity loss we develop our analysis from a widely accepted definition of economics which is based on the concept of scarcity taking a closer look at this notion we find that economics actually limits itself to a very particular aspect of scarcity which we denote as relative scarcity we describe in what respect the economic approach towards biodiversity is based on this notion and also reflect on the specific understanding of the relation of humans and nature behind the economic approach we then turn to absolute scarcity as another notion of scarcity and show that this is not within the scope of economics but has been a theme of ecology and ecological economics we describe in which way ecological and ecological economic approaches towards biodiversity are based on the idea of absolute scarcity and also reflect on the specific understanding of the human nature relationship behind this notion of scarcity against this background we discuss the roles of economics and ecology for nature conservation we conclude that the interdisciplinary integration of ecology and economics requires a philosophical underpinning and suggest a framework for further research

foreign exchange market efficiency tests implications of recent empirical findings abstract the recent empirical literature on the efficiency of the foreign exchange market has been characterized by strikingly contradictory conclusions drawn from similar empirical evidence these contradictions result because 1 different maintained hypotheses are held and 2 different criteria e g micro versus macroeconomic are used to judge the evidence in this survey we organize the empirical literature under several headings the presence of risk premiums empirical regularities in regression tests profitable trading rules and advanced econometric techniques in integrating this material we consider the implications of the current evidence for investors forecasters policy makers and theorists

common nonstationary components of asset prices abstract portfolio separation in a multi period general equilibrium context implies that asset prices are collinear in economies that do not exhibit separation but that move close to separation approximate collinearity or cointegration emerges as a statistical model of actual data a new test for cointegration is proposed it is based on time series canonical correlation analysis and solves the problem of unidentified parameters under the null hypothesis and of identification of the cointegrating vectors when more than two time series are investigated an empirical analysis of prices of five size based portfolios and five industry based portfolios of common stock reveals substantial evidence of cointegration

searching for uncertain benefits and the conservation of biological diversity this paper describes a model under which the maximization of option value leads to a preference for biological diversity arising from potential substitutability among species

cointegration and stock prices the random walk on wall street revisited abstract one of the more famous and empirically regular instances of unit roots occurs in stock price series where they are consistent with rational expectations and efficient markets under certain assumptions in this paper we investigate the dynamic behavior of five stock prices over the volatile period from january 1972 through december 1979 finding that the series are cointegrated with one dominant common trend a component with an estimated root of 0 95 in addition we find a lesser trend and two complex roots in the cycle model these findings are validated by out of sample forecasts beginning in january 1980 in addition to mean squared error criteria the forecasts are evaluated nonparametrically in two separate applications of a test due to henriksson and merton

forward and futures prices evidence from the foreign exchange markets empirical studies of the treasury bill markets have revealed substantial differences between the futures price and the implied forward price these differences have been attributed to taxes transaction costs and the settling up procedure employed in the futures market this paper examines the forward and futures prices in foreign exchange in an attempt to distinguish between the competing explanations empirical studies of the treasury bill market have revealed differences between the futures price or rate and the implicit forward price derived from the term structure of interest rates 1 these differences have generally been attributed to market imperfections such as taxes and transaction costs see for example arak 1 capozza and cornell 2 and rendelman and carabini 6 recently however cox ingersoll and ross 3 henceforth cir derived a model in which forward and futures prices need not be equal even in perfect markets without taxes as long as interest rates are stochastic the significance of the cir effect may be hard to investigate using only data from the bill market because of the potentially complicating effects of taxes and transaction costs unique to this market by using data from the foreign exchange market we are able to eliminate the tax effect and reduce the impact of transaction costs the question we address is whether the discrepancies observed in the treasury bill market are also observed in the foreign exchange market if they are then we have evidence that the differences are due to a combination of the cir effect and the transaction costs common to both markets if they are not then either the magnitude of the cir effect is much less in the foreign exchange market or the treasury bill results are due to the unique tax treatment and transaction costs of that market this paper is organized as follows in section i the trading mechanics of the forward and futures markets in foreign exchange are discussed section ii reviews the explanations for the discrepancies between the forward and futures prices for treasury bills the institutional differences between the foreign exchange and bill markets are also summarized to show which of these explanations cannot apply to the foreign exchange market in section iii the data are decribed and the empirical results are presented the conclusions are summarized in the final section

the treasury yield curve as a cointegrated system this paper examines the temporal relationship between interest rates on treasury securities ranging in maturity from three months to 30 years we find strong empirical support that the seven treasury rates selected are cointegrated a conclusion that is insensitive to the normalization chosen in particular the hypothesis of noncointegration is rejeeted decisively regardless of the rate selected as the dependent variable in the cointegrating equation to determine whether this information can be used to improve forecasts of treasury rates the seven rates are forecasted with a corresponding erroreorrection model that is shown to outperform an augmented var model that ignores the cointegration of the rates the results are consistent with the belief that arbitrage limits the extent to which rates on different maturities of a given security diverge in addition the results confirm the appropriateness of imposing a common stochastic process for interest rates in equilibrium models of the term structure

a two factor cointegrated commodity price model with an application to spread option pricing in this paper we propose an easy to use yet comprehensive model for a system of cointegrated commodity prices while retaining the exponential affine structure of previous approaches our model allows for an arbitrary number of cointegration relationships we show that the cointegration component allows capturing well known features of commodity prices i e upward sloping contango and downward sloping backwardation term structures smaller volatilities for longer maturities and an upward sloping correlation term structure the model is calibrated to futures price data of ten commodities the results provide compelling evidence of cointegration in the data implications for the prices of futures and options written on common commodity spreads e g spark spread and crack spread are thoroughly investigated

common stochastic trends in a system of exchange rates univariate tests reveal strong evidence for the presence of a unit root in the univariate time series representation for seven daily spot and forward exchange rate series furthermore all seven spot and forward rates appear to be cointegrated that is the forward premiums are stationary and one common unit root or stochastic trend is detectable in the multivariate time series models for the seven spot and forward rates respectively this is consistent with the hypothesis that the seven exchange rates possess one longrun relationship and that the disequilibrium error around that relationship partly accounts for subsequent movements in the exchange rates a general consensus has emerged in recent years that many macroeconomic time series such as gnp consumption expenditures disposable income etc can be characterized by a stochastic trend model in particular nelson and plosser 22 described this property as one of being difference stationary so that the first difference of a time series is stationary an alternative trend stationary model where a stationary component is added to a deterministic trend term has generally been found to be less appropriate 1 similarly it has long been recognized that many financial time series such as foreign exchange rates are nonstationary e g in meese and singleton 21 the issue of nonstationary is not merely a statistical curiosity but has several important implications for the modeling of exchange rates for instance many models of exchange rate determination under rational expectations require stationarity assumptions when solving out the expected future values of the fundamentals further there has been some controversy over the appropriate transformations to use when conducting tests of whether the forward rate is an unbiased and efficient predictor of the future spot exchange rate 2 some authors e g frenkel 11 12 have conducted tests in levels while geweke and feige 14