liquidation equilibrium with seniority and hidden cdo the aim of our paper is to price credit derivatives written on a single name when this name is a bank indeed due to the special structure of the balance sheet of a bank and to the interconnections with other institutions of the financial system the standard pricing formulas do not apply and their use can imply severe mispricing the pricing of credit derivatives written on a single bank name requires a joint analysis of the risks of all banks directly or indirectly interconnected with the bank of interest each name cannot be priced in isolation but the banking system must be treated as a whole it is necessary to analyze the contagion of losses among banks especially the equilibrium of joint defaults and recovery rates at liquidation time we show the existence and uniqueness of such an equilibrium then the standard pricing formulas are modified by adding a premium to capture the contagion effects

the political economy of tax reform introduction takatoshi ito and anne o krueger part i 1 international interactions between tax systems and capital flows assaf razin and efraim sadka comments toshihiro ihori and john whalley 2 the role of taxation in the development of east asian economies vito tanzi and parthasarathi shome comment joseph y lim part ii 3 tax reform in japan masaaki homma comments hiromitsu ishi and charles e mclure jr 4 the political economy of tax reforms and their implications for interdependence united states charles e mclure jr 5 tax reform in korea taewon kwack and kye sik lee 6 an appraisal of business tax reform in taiwan the case of value added taxation chuan lin comments ching huei chang and kwang choi part iii 7 the dynamic efficiency effect of a change in the marginal capital income tax rate the nakasone takeshita tax reform tatsuo hatta and hideki nishioka comments medhi krongkaew and assaf razin 8 the role of tax policy in korea s economic growth irene trela and john whalley comments anne o krueger 9 aging of population social security and tax reform yukio noguchi comments hiromitsu ishi maria s gochoco and charles e mclure jr 10 bequest taxes and accumulation of household wealth u s japan comparison thomas a barthold and takatoshi ito comments ching huei chang and hiromitsu ishi 11 taxation of income from foreign capital in korea kun young yun comments toshihiro ihori toshiaki tachibanaki and twatchai yonkittikul 12 tax policy and foreign direct investment in taiwan ching huei chang and peter w h cheng comments kwang choi and toshihiro ihori

stochastic modeling of financial electricity contracts abstract we discuss the modeling of electricity contracts traded in many deregulated power markets these forward futures type contracts deliver either physically or financially electricity over a specified time period and is frequently referred to as swaps since they in effect represent an exchange of fixed for floating electricity price we propose to use the heath jarrow morton approach to model swap prices since the notion of a spot price is not easily defined in these markets for general stochastic dynamical models we connect the spot price the instantaneous delivery forward price and the swap price and analyze two different ways to apply the heath jarrow morton approach to swap pricing either one specifies a dynamics for the non existing instantaneous delivery forwards and derives the implied swap dynamics or one models directly on the swaps the former is shown to lead to quite complicated stochastic models for the swap price even when the forward dynamics is simple the latter has some theoretical problems due to a no arbitrage condition that has to be satisfied for swaps with overlapping delivery periods to overcome this problem a practical modeling approach is analyzed the market is supposed only to consist of non overlapping swaps and these are modelled directly a thorough empirical study is performed using data collected from nord pool our investigations demonstrate that it is possible to state reasonable models for the swap price dynamics which is analytically tractable for risk management and option pricing purposes however this is an area of further research

sulfur dioxide control by electric utilities what are the gains from trade title iv of the 1990 clean air act amendments caaa established a market for transferable sulfur dioxide so2 emission allowances among electric utilities this market offers firms facing high marginal abatement costs the opportunity to purchase the right to emit so2 from firms with lower costs and this is expected to yield cost savings compared to a command and control approach to environmental regulation this paper uses econometrically estimated marginal abatement cost functions for power plants affected by title iv of the caaa to evaluate the performance of the so2 allowance market specifically we investigate whether the much heralded fall in the cost of abating so2 compared to original estimates can be attributed to allowance trading we demonstrate that for plants that use low sulfur coal to reduce so2 emissions technical change and the fall in prices of low sulfur coal have lowered marginal abatement cost curves by over 50 percent since 1985 the flexibility to take advantage of these chan

a spot forward model for electricity prices with regime shifts 2014 elsevier b v all rights reserved this is the authors manuscript preprint to the article

futures pricing in electricity markets based on stable carma spot models we present a new model for the electricity spot price dynamics which is able to capture seasonality low frequency dynamics and the extreme spikes in the market instead of the usual purely deterministic trend we introduce a non stationary independent increments process for the low frequency dynamics and model the large uctuations by a non gaussian stable carma process the model allows for analytic futures prices and we apply these to model and estimate the whole market consistently besides standard parameter estimation an estimation procedure is suggested where we t the non stationary trend using futures data with long time until delivery and a robust l 1 lter to nd the states of the carma process the procedure also involves the empirical and theoretical risk premiums which as a by product are also estimated we apply this procedure to data from the german electricity exchange eex where we split the empirical analysis into base load and peak load prices we nd an overall negative risk premium for the base load futures contracts except for contracts close to delivery where a small positive risk premium is detected the peak load contracts on the other hand show a clear positive risk premium when they are close to delivery while the contracts in the longer end also have a negative premium ams 2000 subject classications primary 60g52 62m10 91b84 secondary 60g10 60g51 91b70

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

common and unique factors influencing daily swap returns in the nordic electricity market 1997 2005 this paper demonstrates that electricity swap returns can be explained by a set of uncorrelated common and unique risk factors electricity swap returns differ from return data in other markets by a significant portion of overall risk being unaccounted for by common factors it follows that hedging a given exposure with an exposure in another segment of the swap market could be fallible furthermore the volatility function common to all swaps may have to be augmented by unique risk in applied pricing applications

testing for a unit root in the volatility of asset returns it is now well established that the volatility of asset returns is time varying and highly persistent one leading model that is used to represent these features of the data is the stochastic volatility model the researcher may test for non stationarity of the volatility process by testing for a unit root in the log squared time series this strategy for inference has many advantages but is not followed in practice because these unit root tests are known to have very poor size properties in this paper i show that new tests that are robust to negative ma roots allow a reliable test for a unit root in the volatility process to be conducted in applying these tests to exchange rate and stock returns strong rejections of non stationarity in volatility are obtained copyright 1999 john wiley sons ltd

estimating bilateral exposures in the german interbank market is there a danger of contagion abstract credit risk associated with interbank lending may lead to domino effects where the failure of one bank results in the failure of other banks not directly affected by the initial shock recent work in economic theory shows that this risk of contagion depends on the precise pattern of interbank linkages we use balance sheet information to estimate a matrix of bilateral credit relationships for the german banking system and test whether the breakdown of a single bank can lead to contagion we find that in the absence of a safety net there is considerable scope for contagion that could affect a large proportion of the banking system the financial safety net in this case institutional guarantees for saving banks and cooperative banks considerably reduces but does not eliminate the danger of contagion even so the failure of a single bank could lead to the breakdown of up to 15 of the banking system in terms of assets

empirics of crosscountry tax revenue comparisons abstract this paper provides a crosscountry comparison of various aspects of summary tax revenue data in a broad sample of developed and developing countries and over a recent period of sufficient length to highlight important comparative country revenue developments quantitatively and assess their significance a novel investigation of the paper relates to the statistical convergence or divergence of country tax revenue gdp ratios for the entire sample of countries it is found that both the income and domestic consumption tax revenue ratios showed statistically significant signs of divergence over the sample period on a regional basis however the former ratio tended to converge while the reverse held for the latter ratio the trade tax revenue ratio showed strong signs of convergence for most country groups and convergence in all tax ratios were detected among the newly industrialized economies

bilateral exposures and systemic solvency risk en utilisant une structure des etats financiers des banques qui tient compte de leurs expositions bilaterales en termes d actions et de prets on developpe un modele structurel de faillite ce modele permet de distinguer les facteurs exogenes et endogenes dont depend la faillite on prouve l existence et l unicite de l equilibre de liquidation on etudie les consequences des chocs exogenes sur le systeme bancaire et on mesure le phenomene de contagion on illustre l usage de cette approche en l appliquant au systeme bancaire francais

the federal funds market excess reserves and unconventional monetary policy abstract following the bankruptcy of lehman brothers interbank borrowing and lending dropped whereas reserve holdings of depository institutions skyrocketed as the fed injected liquidity into the u s banking sector this paper introduces bank liquidity risk and limited market participation into a real business cycle model with ex ante identical financial intermediaries and shows in an analytically tractable way how interbank trade and excess reserves emerge in general equilibrium investigating the role of the federal funds market and unconventional monetary policy for the propagation of aggregate real and financial shocks i find that federal funds market participation is irrelevant in response to standard supply and demand shocks whereas it matters for uncertainty shocks i e mean preserving spreads in the cross section of liquidity risk liquidity injections by the central bank can absorb the effects of financial shocks on the real economy although excess reserves might increase and federal funds might be crowded out as a side effect

revisiting the relationship between spot and futures prices in the nord pool electricity market abstract this work discusses potential pitfalls of applying linear regression models for explaining the relationship between spot and futures prices in electricity markets in particular the bias coming from the simultaneity problem the effect of correlated measurement errors and the impact of seasonality on the regression results studying a 13 year long 1998 2010 price series of spot and futures prices at nord pool and employing regression models with garch residuals we show that the impact of the water reservoir level on the risk premium is positive which is to be expected but contradicts the results of botterud et al 2010 we also show that after taking into account the seasonality of the water level the storage cost theory proposed by botterud et al 2010 to explain the behavior of convenience yield has only limited support in the data

a new measure of cross sectional risk and its empirical implications for portfolio risk management abstract litterman et al litterman r scheinkman j weiss l 1991 volatility and the yield curve journal of fixed income 1 june 49 53 and engle and ng engle r f ng v k 1993 time varying volatility and the dynamic behavior of the term structure journal of money credit and banking 25 3 336 349 provide empirical evidence of a relation between yield curve shape and volatility this study offers theoretical support for that finding in the general context of cross sectional time series we introduce a new risk measure quantifying the link between cross sectional shape and market risk a simple econometric procedure allows us to represent the risk experienced by cross sections over a time period in terms of independent factors reproducing possible cross sectional deformations we compare our risk measure to the traditional cross yield covariance according to their relative performance empirical investigation in the us interest rate market shows that 1 cross shape risk factors outperform cross yield risk factors i e yield curve level slope and convexity in explaining the market risk of yield curve dynamics 2 hedging multiple liabilities against cross shape risk delivers superior trading strategies compared to those stemming from cross yield risk management

growth the external terms of trade and endogenous trade liberalization we study the effects of growth and changes in the external terms of trade on protection there are two sectors an urban sector and a rural sector and trade policy is used to redistribute income between them we show that growth precedes trade liberalization in addition we find that trade reform is triggered by falls in the world prices of primary exports or intermediate imports these results are shown to hold for tariffs and quotas

tax incentives for business investment a primer for policy makers in developing countries abstract the use of tax incentives is widespread even though the available empirical evidence on the cost effectiveness of such incentives in stimulating investment is highly inconclusive this paper is primarily intended as a primer on the use of tax incentives for policy makers especially those in developing countries it discusses the objectives cost effectiveness and transparency of implementing tax incentives assesses the comparative merits of alternative forms of such incentives and provides a review of the empirical literature its main conclusions are that the justification for the use of tax incentives should be limited to the rectification of market failures and that the preferred form of tax incentives are those that provide for faster recovery of investment costs

the impact of renewable energies on eex day ahead electricity prices in this paper we analyze the impact of renewable energies wind and photovoltaic on the formation of day ahead electricity prices at eex we give an overview of the policy decisions concerning the promotion of renewable energy sources in germany and discuss their consequences on day ahead prices an analysis of electricity spot prices reveals that the introduction of renewable energies enhances extreme price changes in the frame of a dynamic fundamental model we show that there has been a continuous electricity price adaption process to market fundamentals furthermore the fundamental drivers of prices differ among hours with different load profiles our results imply that renewable energies decrease market spot prices and have implications on the traditional fuel mix for electricity production however the prices for the final consumers increased overall because they must pay in addition the feed in tariffs for the promotion of renewable energy

a space time random field model for electricity forward prices abstract stochastic models for forward electricity prices are of great relevance nowadays given the major structural changes in the market due to the increase of renewable energy in the production mix in this study we derive a spatio temporal dynamical model based on the heath jarrow morton hjm approach under the musiela parametrization which ensures an arbitrage free model for electricity forward prices the model is fitted to a unique data set of historical price forward curves as a particular feature of the model we disentangle the temporal from spatial maturity effects on the dynamics of forward prices and shed light on the statistical properties of risk premia of the noise volatility term structure and of the spatio temporal noise correlation structures we find that the short term risk premia oscillates around zero but becomes negative in the long run we identify the samuelson effect in the volatility term structure and volatility bumps explained by market fundamentals furthermore we find evidence for coloured noise and correlated residuals which we model by a hilbert space valued normal inverse gaussian levy process with a suitable covariance functional

the relationship between spot and futures prices in the nord pool electricity market abstract we analyze 11 years of historical spot and futures prices from the hydro dominated nord pool electricity market we find that futures prices tend to be higher than spot prices the average convenience yield is therefore negative but varies by season and depends on the storage levels in hydro reservoirs the average realized return on holding a long position in the futures market is also negative the negative convenience yield and risk premium contrast empirical findings in most other commodity markets we argue that differences between the supply and demand sides in terms of risk preferences and the ability to take advantage of short term price variations can contribute to explain the observed relationship between spot and futures prices in addition our analysis shows that the relationship between spot and futures prices is clearly linked to the physical state of the system such as hydro inflow reservoir levels and demand

shape factors and cross sectional risk abstract galluccio and roncoroni 2006 empirically demonstrate that cross sectional data provide relevant information when assessing dynamic risk in fixed income markets we put forward a theoretical framework supporting that finding based on the notion of shape factors we devise an econometric procedure to identify shape factors propose a dynamic model for the yield curve develop a corresponding arbitrage pricing theory derive interest rate pricing formulae and study the analytical properties exhibited by a finite factor restriction of rate dynamics that is cross sectionally consistent with a family of exponentially weighed polynomials we also conduct an empirical analysis of cross sectional risk affecting us swap euro bond and oil markets results support the conclusion whereby shape factors outperform the classical yield resp price factors i e level slope and convexity in explaining the underlying fixed income resp commodity market risk the methodology can in principle be used for understanding the intertemporal dynamics of any cross sectional data

systemic risk in financial systems we consider default by firms that are part of a single clearing mechanism the obligations of all firms within the system are determined simultaneously in a fashion consistent with the priority of debt claims and the limited liability of equity we first show via a fixed point argument that there always exists a clearing payment vector that clears the obligations of the members of the clearing system under mild regularity conditions this clearing vector is unique next we develop an algorithm that both clears the financial system in a computationally efficient fashion and provides information on the systemic risk faced by the individual system firms finally we produce qualitative comparative statics for financial systems these comparative statics imply that in contrast to single firm results even unsystematic nondissipative shocks to the system will lower the total value of the system and may lower the value of the equity of some of the individual system firms

constructing forward price curves in electricity markets we present and analyze a method for constructing approximated high resolution forward price curves in electricity markets because a limited number of forward or futures contracts are traded in the market only a limited picture of the theoretical continuous forward price curve is available to the analyst our method combines the information contained in observed bid and ask prices with information from the forecasts generated by bottom up models as an example we use information concerning the shape of the seasonal variation from a bottom up model to improve the forward price curve quoted on the nordic power exchange

interbank lending and systemic risk systemic risk refers to the propagation of a bank s economic distress to other economic agents linked to that bank through financial transactions banking authorities often prevent systemic risk through an implicit insurance of interbank claims or by reducing interbank transactions and centralizing banks liquidity management this paper investigates whether the flexability afforded by decentralized bank interactions can be preserved while protecting the central banks from the necessity of conducting undesired rescue operations it develops a model in which decentralized interbank leading is motivated by peer monitoring in this context the paper derives the optimal prudential rules and in particular looks at the impact of interbank monitoring on the solvency and liquidity ratios of borrowing and lending banks last it provides conditions which a too big to fail policy is or is not justified and studies the possibility of propagation of a bank s liquidity shock throughout the financial system copyright 1996 by ohio state university press