a dynamic real option based investment model for renewable energy portfolios this work proposes a dynamic model to devise the optimal risk averse investment policy in a portfolio of complementary renewable sources for a generation company in the brazilian power system the proposed method merges a static energy contracting model based on a hybrid robust and stochastic optimization approach with a mean reverting binomial lattice model for real option valuation the proposed merge extends previous works by providing support to risk averse investment decisions in complementary renewable sources dynamically distributed over time the most important results of the model are how much capacity to invest or build from each renewable source how much to sell from the energy portfolio in bilateral contracts and the optimal timing to invest unlike previous reported works our model takes into account three classes of uncertainties simultaneously renewable production of candidate sources and prices in the spot and contract markets a case study with realistic data from the brazilian power system is presented to illustrate the value of our model

interest rate caps smile too but can the libor market models capture the smile using 3 years of interest rate caps price data we provide a comprehensive documentation of volatility smiles in the caps market to capture the volatility smiles we develop a multifactor term structure model with stochastic volatility and jumps that yields a closed form formula for cap prices we show that although a three factor stochastic volatility model can price at the money caps well significant negative jumps in interest rates are needed to capture the smile the volatility smile contains information

support systems for the diffusion of renewable energy technologies an investor perspective concern over climate change impacts and the projected depletion of fossil fuels has urged more governments to adopt policies that stimulate the diffusion of renewable energy technologies ret with an increasingly diverse suite of support instruments the question emerges as to which instruments or combinations are able to achieve faster more substantial diffusion results although various support instruments were extensively addressed in policy studies there is still no consensus this is partly because many policy studies take a policy maker approach in comparing support instruments leaving relationships between policy design and policy results as a black box this paper proposes an investor oriented perspective to analyze the diffusion potential of support systems for ret the main argument is that it is not the type of support instrument but rather its risk profitability characteristics that influence investor behavior and the rate of diffusion the two instruments most frequently discussed and compared are the feed in tariff and the quota model the analysis in this paper concludes that policy design is crucial while often feed in tariffs are applauded and quota system feared feed in tariffs may also bring about disappointing diffusion results when poorly designed while quota systems may be also conceived as attractive instruments for independent power producers

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

uk innovation systems for new and renewable energy technologies drivers barriers and systems failures abstract a better understanding of the systemic processes by which innovation occurs is useful both conceptually and to inform policy making in support of innovation in more sustainable technologies this paper analyses current innovation systems in the uk for a range of new and renewable energy technologies and generates policy recommendations for improving the effectiveness of these innovation systems although incentives are in place in the uk to encourage innovation in these technologies system failures or gaps are identified in moving technologies along the innovation chain preventing their successful commercialisation sustained investment will be needed for these technologies to achieve their potential it is argued that a stable and consistent policy framework is required to help create the conditions for this in particular such a framework should be aimed at improving risk reward ratios for demonstration and pre commercial stage technologies this would enhance positive expectations stimulate learning effects leading to cost reductions and increase the likelihood of successful commercialisation

nonlinear mean reversion in the short term interest rate using a new bayesian method for the analysis of diffusion processes this article finds that the nonlinear drift in interest rates found in a number of previous studies can be confirmed only under prior distributions that are best described as informative the assumption of stationarity which is common in the literature represents a nontrivial prior belief about the shape of the drift function this belief and the use of flat priors contribute strongly to the finding of nonlinear mean reversion implementation of an approximate jeffreys prior results in virtually no evidence for mean reversion in interest rates unless stationarity is assumed finally the article documents that nonlinear drift is primarily a feature of daily rather than monthly data and that these data contain a transitory element that is not reflected in the volatility of longermaturity yields the drift of the short term interest rate is an important determinant of a wide variety of asset prices both inside and outside the boundaries of what is often called fixed income while volatilities may be estimated relatively accurately using high frequency observations of the short rate the short rate s extreme persistence makes identifying the true shape of the drift function a particularly elusive goal if our goal is merely to fit prices then the difficulty in estimating a drift function can be avoided by backing out implied drifts using a no arbitrage approach such as hull and white 1990 or heath jarrow and morton 1992 these methods bypass the true distribution entirely focusing on solving for the risk neutral drift function that is consistent with the cross section of bond prices if our goal however is to learn from prices and to be able to assess theories such as the expectations hypothesis that link short and long rates then estimating the drift function under the true measure is unavoidable in several recent articles a variety of sophisticated econometric techniques have been brought to bear on the problem in particular

critical evaluation of financial supporting schemes for wind based projects case study greece after a long stagnating period during the second half of the 1990s the market of wind energy in greece was described by remarkable but unstable growth rates that resulted in the operation of 1 gw of wind power by the end of 2009 still though penetration of wind energy is not the one anticipated on the other hand national targets regarding the renewable energy sources res contribution and existence of excellent wind potential areas across greece challenge new wind energy investments acknowledging the unsteady development rates of wind power in greece efficiency of the state support mechanisms is currently investigated based on an analytical evaluation model the investigation undertaken is extended to provide a detailed cost benefit analysis of several wind energy case studies including mainland and island applications as well as comparison with both conventional power stations and photovoltaic plants for this purpose the financial support provided by the state is directly compared with benefits accruing from the operation of wind parks considering also the avoidance of social costs deriving from thermal power stations based on the results obtained the beneficial characteristics of wind energy applications for the greek society are clearly demonstrated especially in the case of non interconnected island grids

business unit strategy and changes in the product r d budget this study of changes in product r d intensity in business units supplements past studies by including two major classes of independent variables which have not been examined previously the competitive strategy of the business and role of the business in the overall corporate portfolio multiple regression analysis is used on a sample drawn from the pims data base the results suggest that r d decisions in growth businesses are responsive to competition evolving strategies and intra firm resource flows in mature businesses a pattern of stability and r d equilibrium is evident even in the face of changes by competitors managerial implications are noted

economic analysis of different supporting policies for the production of electrical energy by solar photovoltaics in western european union countries abstract within various renewable energy technologies photovoltaics pv today attracts considerable attention due to its potential to contribute a major share of renewable energy in the future however pv market development is undoubtedly dependent on the political support of any given country in this paper after a brief analysis of national support policies in pv technology in western european union eu countries the authors perform an economic analysis of the main support mechanisms as implemented in the same countries based on the calculation of the cash flow the net present value npv and the internal rate of return irr indices the analysis shows that in some situations support policies can be inconvenient for the owner of the pv based generation system and that in many cases the differences between the implementation of the same support policy in different countries can give rise to significantly different results the analysis carried out in this work could help to assess the impact of pv energy policies in different western european member states renewable energy companies to identify potential pv markets and investigate the policy landscape across western eu countries

optimal economic dispatch and risk management of thermal power plants in deregulated markets this paper presents a methodology for the valuation optimization market margin and credit risk management of gas fired power plants and associated tolling contracts term structure models for the power and gas forward curves are employed to facilitate hedging and risk adjustment and for improved forecasting of short term prices the model for the power forward curve is capable of reproducing the important phenomena often observed in power markets including spot price spikes and spike clustering negative prices and the empirically observed volatility term structures of power and gas forward prices as well as the correlation term structure between these forward curves the method solves the stochastic dynamic optimization problem that arises from the inclusion of the various operational constraints of gas fired power plants including minimum uptime and downtime requirements ramp rate restrictions and costs variable output and efficiency rates and minimum generation levels the model involves the so

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

executive incentives and the horizon problem an empirical investigation abstract this paper investigates the hypothesis that ceos in their final years of office manage discretionary investment expenditures to improve short term earnings performance we examine the behavior of r d expenditures for a sample of firms in industries that have significant ongoing r d activities the results suggest that ceos spend less on r d during their final years in office however we find the reductions in r d expenditures are mitigated through ceo stock ownership there is no evidence that the reduced r d expenditures are associated with either poor firm performance or reductions in investment expenditures that are capitalized for accounting purposes

towards a sustainable electrification in ghana a review of renewable energy deployment policies abstract ghana has been facing perennial power rationing over the years due to fuel supply challenges the country s energy system is likely to suffer additional strain from rising energy demand fueled by population growth rapid urbanization and economic development fortunately there are enormous renewable energy resources which can provide sustainable electrification as backbone to socioeconomic development while curbing global warming ghana s energy strategy targets 100 access to electricity and 10 share of sustainable power in national generation mix by 2020 despite the existence of numerous policies and a renewable energy act current contribution of non conventional renewable energy to electricity generation is less than 1 the right mix of policies to address the unique domestic conditions and achieve its specific development goals remains insufficient this study reviews the regulatory framework financing incentives and other provisions of ghana s renewable energy act it critically examines the policy s strengths weaknesses opportunities and treats based on comparative analysis and lessons drawn from failed and successful implementation of similar policies around the world the study also assesses the impact of policy on project development it was found that the performance of ghana s renewable energy policy on grid connected electricity has been poor compared to its target the fundamental reasons for this unsatisfactory performance may be attributed to partial implementation of policies lack of market driven support schemes lack of pricing policy framework weak grid network limited access to funds and inconsistencies in renewable energy development strategies this study proposes the following countermeasures i ghana should comprehensively harmonize renewable energy regulatory and fiscal policies with domestic electricity pricing regime ii market driven support schemes should be prioritized for cost effectiveness and minimum governmental influence these reforms can help eliminate some of the major barriers to sustainable electrification in ghana while the lessons provide a learning curve for other african countries

ceo characteristics and firm r d spending over the past fifteen years a number of studies have examined the determinants of firm r d spending these studies however almost invariably focus on the role of firm or external ownership characteristics in predicting r d spending while overlooking the attributes of the top managers involved in allocating corporate resources in this study we change that focus by empirically examining how r d spending as compared to industry competitors varies at firms based on the characteristics of their ceos using a sample of publicly traded firms we find that ceo characteristics explain a significant proportion of the sample variance in firm r d spending even when corporate strategy ownership structure and other firm level attributes are controlled in terms of individual ceo characteristics we find that r d spending is greater at firms where ceos are younger have greater wealth invested in firm stock and signifacant career experience in marketing and or engineering r d in contrast to existing theory we find that the amount of a ceo s formal education had no significant association with r d spending once a ceo has attained a college degree however significant r d spending increases are found at firms where ceos have advanced science related degrees from subgroup analyses we further find that ceo effects on relative r d spending increase with longer ceo tenure implying that ceos over time may mold r d spending to suit their own preferences from these results we make implications for both research on determinants of r d spending and managerial practice

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

legislative framework for photovoltaics in greece a review of the sector s development abstract the law 3468 2006 provided for first time in 2006 appealing feed in tariff fit incentives for photovoltaics pvs in greece the response of the national market was immediate in less than 2 years time two subsequent laws formed an even more attractive investment and licensing context both for field and building installations by introducing additional guarantees and improved grid connection procedures however the unexpectedly large amount of applications submitted until 2011 with aggregate pv capacities which exceeded the national target for 2020 caused continuously tremendous delays in grid connection processes undoubtedly the effectiveness of this legislative framework cannot be judged solely by the response of prospective investors in that sense main objectives of this paper are to present and discuss about the effective provisions as well as the major weaknesses of the fit legislation in greece since 2006 associated mainly with its attractiveness to investors and its cost effectiveness towards preserving and supporting the greek pv market the paper concludes with a technoeconomic assessment which evaluates pv projects viability especially those ones whose provision of grid connection offer was postponed several times

generalising interest rate duration with directional derivatives direction x and applications conventional or fisher weil duration is an ordinary derivative that measures the response of portfolio value to marginal parallel shifts in the term structure while other proposed measures are generally specific to particular interest rate processes in this paper we show that portfolio responses to arbitrary shifts in the term structure may be handled by the use of frechet or directional derivatives presenting a simple algorithm for the directional derivative of a fixed interest portfolio viewed as a set of cash flows for a given portfolio one can locate the most sensitive areas along the term structure by computing a function or profile direction x that gives the term structure movement to which the portfolio is most exposed immunisation techniques can be based on choosing ancillary assets that ensure that the portfolio directional derivative is zero or as close to zero as possible this generalises approaches based on factor models of the term structure the analysis is applied to both continuous and discrete time

solar feed in tariffs examining fair and reasonable retail rates using cost avoidance estimates abstract growing solar photovoltaic pv electricity systems in geographically diverse regions presents a complex policy problem for governments during 2013 16 the queensland government in australia examined establishing a fair and reasonable retail feed in tariff fit policy noting it regulates state retail electricity consumption prices a combined cost avoidance and stakeholder analysis was applied to show that determination of a fair and reasonable fit for all stakeholders while aspirational is difficult to achieve typically agreement on a fair tariff rate will depend on stakeholders relative position in energy supply chains service providers retailers suppliers customers advocates and interpretations of fairness that can be shaped by competition in the supply area also increases in financial benefits to pv customers might be considered unreasonable by non pv customers and retailers that experience increases in electricity prices and operating costs importantly the application of a retail fit in regional and isolated areas requires careful energy policy design taking account of network losses remote and isolated customer metering cost effective network control technologies and diesel generator operating limits the study also observed that shifting funding of fit schemes from electricity distributors to competitive retailers will likely have negative consequences for retail fit offerings and pv customer servicing

representing the valuation of take or pay provisions in gas markets with limited liquidity long term contracting is the traditional governance mechanism to deal with the transaction costs associated with the specificity of gas industry assets long term contracts have been often used to allocate risks among players and to that end they often include take or pay provisions these clauses specify that buyers take the volume risk as they are obliged to pay for a minimum amount of gas consumption in exchange buyers pay a predefined price supposedly lower than the risk neutral expectation of short term gas prices in that view if the buyer is able to resell that gas in the short term the contract is an effective hedge against short term volatility otherwise the contract does not act as a hedge but it becomes a sunk cost the corresponding power producers behavior involves not only output decisions but also financial decisions to analyze that situation this paper develops a new quantitative methodology that allows comparing risk neutral valuations of gas and power markets decisions we test the model in a real size system and show the additional cost of the power system associated with a possible illiquidity of the short term gas market

valuing risky fixed rate debt an extension this paper develops a corporate bond valuation model that takes into account both early default and interest rate risk it corrects a defect of recent contributions where pricing equations do not assure that the payment to bondholders upon bankruptcy is no greater than firm value the bankruptcy triggering mechanism is directly related to the payoff received by bondholders when early bankruptcy is forced upon the firm more specifically the default barrier is defined simply as a fixed quantity discounted at the riskless rate up to the maturity date of the risky corporate bond as soon as this threshold is crossed bondholders receive an exogenously specified fraction ofthe remaining assets deviations from the absolute priority rule also are captured because it accounts for gaussian interest rate uncertainty default risk and deviations from the absolute priority rule this model is capable of producing quite diverse shapes for the term structure of yield spreads

determinants of pro environmental consumption the role of reference groups and routine behavior abstract this paper investigates the determinants of pro environmental consumption focusing on the role of reference groups and routine behavior we study the factors that explain whether or not people have installed residential solar energy equipment or have subscribed to green electricity programs and the factors that influence the intensity of buying organic food in addition to demographic characteristics and environmental attitudes we consider the following categories of determinants economic and cognitive factors income estimated price premium level of information on environmentally friendly goods consumption patterns of reference persons own consumption patterns in the past using a unique data set from a survey conducted in the region of hanover germany we find the following 1 economic and cognitive factors are significant covariates of all three kinds of pro environmental consumption their influence is greatest in the case of green electricity 2 consumption patterns of reference persons are significant covariates of all three kinds of pro environmental consumption their influence is greatest in the case of organic food 3 the intensity of buying organic food is greater the longer people have been consumers of these goods

the structure of residential energy demand in greece abstract this paper attempts to shed light on the determinants of residential energy demand in greece and to compare it with some other oecd countries from the estimates of the short run and long run elasticities of energy demand for the period 1965 1999 we find that residential energy demand appears to be price inelastic also we do not find evidence of a structural change probably because of the low efficiency of the energy sector we find however that the magnitude of the income elasticity varies substantially between greece and other oecd countries

implementing a stochastic model for oil futures prices this paper develops a parsimonious three factor model of the term structure of oil futures prices that can be easily estimated from available futures price data in addition it proposes a new simple spreadsheet implementation procedure the procedure is flexible may be used with market prices of any oil contingent claim with closed form pricing solution and easily deals with missing data problems the approach is implemented using daily prices of all futures contracts traded at the new york mercantile exchange between 1991 and 2001 in sample and out of sample tests indicate that the model fits the data extremely well though the paper concentrates on oil the approach can be used for any other commodity with well developed futures markets

risk constrained generation asset arbitrage in power systems a competitive generating company genco can maximize its payoff by optimizing its generation assets this paper considers the genco s arbitrage problem using stochastic price based unit commitment while considering the associated risks the genco may consider arbitrage opportunities in purchases from qualifying facilities qfs as well as simultaneous trades with spot markets for energy ancillary services fuel and emission allowance the tradeoff between maximizing expected payoffs and minimizing risks due to market price uncertainties is modeled explicitly by including the expected downside risk as a constraint the downside risk is defined as the unfulfilled profit the monte carlo simulation is applied to generate scenarios and scenario reduction techniques are applied to reduce the number of scenarios while maintaining a good approximation of the exact solution the proposed case studies illustrate the significance of arbitrage in multi commodity markets and the importance of considering the uncertainty of market prices

stochastic valuation of energy storage in wholesale power markets abstract energy storage systems are well poised to mitigate uncertainties of renewable generation outputs grid scale energy storage projects are major investments which call for rigorous valuation and risk analysis this paper provides a stochastic energy storage valuation framework in wholesale power markets which considers all key revenue streams simultaneously as part of this framework an operational optimization model is developed to determine the energy storage system s optimal dispatch sequences a future curve model is built to capture the volatilities of electricity prices in addition a frequency regulation service price forecasting model is developed simulation results with a realistic battery storage system reveal that the majority of the market revenues comes from frequency regulation services simulation results also show that both round trip efficiency and power to energy ratio are crucial to the cost effectiveness of energy storage systems

the price setting behavior of banks an analysis of open end leverage certificates on the german market abstract this paper presents the first analysis of open end leverage certificates on the german market the major innovations of these certificates are twofold first issuers announce a price setting formula according to which they are willing to buy and sell the certificates over time second the product s lifetime is potentially endless our main findings are that the price setting formula is i designed to strongly favor the issuer and ii is consistent with the main outcome of the life cycle hypothesis for structured financial products stoimenov p a wilkens s 2005 are structured products fairly priced an analysis of the german market for equity linked instruments journal of banking and finance 29 2971 2993 iii this holds for different product features and also in the presence of issuers credit risk and jump risk in the underlying

a defaultable hjm modelling of the libor rate for pricing basis swaps after the credit crunch abstract a great deal of recent literature discusses the major anomalies that have appeared in the interest rate market following the credit crunch in august 2007 there were major consequences with regard to the development of spreads between quantities that had remained the same until then in particular we consider the spread that opened up between the libor rate and the ois rate and the consequent empirical evidence that fra rates can no longer be replicated using libor spot rates due to the presence of a basis spread between floating legs of different tenors we develop a credit risk model for pricing basis swaps in a multi curve setup the libor rate is considered here as a risky rate subject to the credit risk of a generic counterparty whose credit quality is refreshed at each fixing date a defaultable hjm methodology is used to model the term structure of the credit spread defined through the implied default intensity of the contributing banks of the libor corresponding to a chosen tenor a forward credit spread volatility function depending on the entire credit spread term structure is assumed in this context we implement the model and obtain the price of basis swaps using a numerical scheme based on the euler maruyama stochastic integral approximation and the monte carlo method

continuous time methods in finance a review and an assessment i survey and assess the development of continuous time methods in finance during the last 30 years the subperiod 1969 to 1980 saw a dizzying pace of development with seminal ideas in derivatives securities pricing term structure theory asset pricing and optimal consumption and portfolio choices during the period 1981 to 1999 the theory has been extended and modified to better explain empirical regularities in various subfields of finance this latter subperiod has seen significant progress in econometric theory computational and estimation methods to test and implement continuous time models capital market frictions and bargaining issues are being increasingly incorporated in continuous time theory the roots of modern continuous time methods in finance can be traced back to the seminal contributions of merton 1969 1971 1973b in the late 1960s and early 1970s merton 1969 pioneered the use of continuous time modeling in financial economics by formulating the intertemporal consumption and portfolio choice problem of an investor in a stochastic dynamic programming setting merton 1973b also showed how such a framework can be used to develop equilibrium asset pricing implications thereby significantly extending the asset pricing theory to richer dynamic settings and expanding the scope of applications of continuous time methods to study problems in financial economics 1 within a span of about 30 years from the publication of merton s inf luential papers continuous time methods have become an integral part of financial economics indeed in certain core areas in finance such as e g asset pricing derivatives valuation term structure theory and portfolio selection continuoustime methods have proved to be the most attractive way to conduct research and gain economic intuition the continuous time approach in these areas has produced models with a rich variety of testable implications the econometric theory for testing continuous time models has made rapid strides in the last decade and has thus kept pace with the impressive progress on the theoretical front one hopes that the actual empirical investigations and estimation using the new procedures will follow suit soon

the cost and duration of cash balance pension plans controversy about the fairness of early transitions from traditional defined benefit plans to cash balance plans may have overshadowed the subtleties of funding a cash balance pension liability because crediting rates of cash balance liabilities float with market rates the same techniques used to value and hedge floating rate bonds provide the present value cost and effective duration of a cash balance liability the present value cost of funding a liability varies dramatically across the menu of irs sanctioned crediting alternatives for example given the yield curve from november 15 1999 the present value per 1 00 of cash balance of funding a liability paying off 30 years from now varies between 0 90 and 1 48 the effective duration of a cash balance liability also varies dramatically according to various crediting rates the effective duration is typically positive but much shorter than the expected time until retirement or other payment and depending on the choice of crediting rate can vary

a reexamination of the uncovered interest rate parity hypothesis abstract it is now widely known that the uncovered interest rate parity uip hypothesis which states that forward exchange rates are unbiased predictors of future spot exchange rates is generally rejected by empirical evidence we show in this paper by means of a cox et al 1985 model extended to a two country economy that a careful examination of the no arbitrage principle leads to a different formulation for this hypothesis roughly speaking this new formulation states that the expected future spot exchange rate is equal to the forward exchange rate multiplied by a term premium whose closed form expression can be derived moreover this multiplicative term premium reduces to 1 i e the standard uip hypothesis holds if and only if conditional variances are deterministic in short we show that rejection of the standard uip hypothesis is not surprising as long as arch effects have been evidenced in exchange rate data as a by product we provide a parametric and tractable specification for the so called risk premium i e the component of the expected exchange rate in excess of the forward exchange rate

agency models in different stages of ceo tenure the effects of stock options and board independence on r d investment this study examines how r d investment is shaped by governance devices combining the two agency models of limited competence and managerial opportunism it suggests that governance devices exert differing effects in early vs later stages of ceo tenure early in ceo tenure r d investment is reduced by stock options and board independence whereas in later stages these effects reverse r d investment is enhanced by stock options and board independence an empirical test on a sample of u s companies provides support for the hypothesized effects for policy makers this study implies that r d investment can be enhanced by setting rules and standards of good governance that take into account ceo time in office and firm context

implications of implicit credit spread volatilities on interest rate modelling abstract we test seven term structure models in the heath jarrow and morton 1992 class in order to find the best representation of the libor rate in interest rate markets after the credit crunch of 2007 the libor rate is considered as a risky rate subject to the credit risk of a generic counterparty whose credit quality is refreshed at each fixing date we study the volatilities of the credit spreads implicitly obtained from libor time series in order to understand how assumed volatility functions affect interest rate curve modelling and asset pricing we develop a model to estimate basis swap prices through the monte carlo simulations we compare obtained results and individuate systematic relations existing between the basis spread forecast error and both the accuracy in volatility modelling and the accuracy of the monte carlo estimates we analyse and document these relations by defining appropriate pricing error measures

energy supply security and geopolitics a european perspective the security of energy supply to the eu is examined in the context of two storylines markets and institutions exemplifies an economically and politically integrated multilateral world with effective institutions and markets regions and empires involves a world broken up in rival political and economic blocks competing for resources and markets via political economic and military power it is shown that these storylines have a significant impact on the development of the energy market on the way in which energy supply may be secured and on the effect and applicability of the several types of instruments available the current eu is geared towards enlargement and a deepening of economic integration based on the tenets of the post 1945 multilateral world system the present world tends towards regions and empires and suggests that the eu may have to reorient its energy security policy energy policy must become an integral part of eu external trade and foreign relations and security policy the eu should develop its own strategy actively investing in dialogues with producer countries in the persian gulf and africa and with russia sustainable prosperity and governance in these regions will support eu energy security

an empirical comparison of alternate regime switching models for electricity spot prices one of the most profound features of electricity spot prices are the price spikes markov regime switching mrs models seem to be a natural candidate for modeling this spiky behavior however in the studies published so far the goodness of fit of the proposed models has not been a major focus while most of the models were elegant their fit to empirical data has either been not examined thoroughly or the signs of a bad fit ignored with this paper we want to fill the gap we calibrate and test a range of mrs models in an attempt to find parsimonious specifications that not only address the main characteristics of electricity prices but are statistically sound as well we find that the most universal and robust structure is that of an independent spike 3 regime model with heteroscedastic diffusion type base regime dynamics and shifted spike regime distributions

an analysis of the greek photovoltaic market abstract the number of photovoltaic applications has increased slightly over the last 10 years in greece with a forecasted 40 increase in the annual rate of sales over the next few years a target similar to the rest of the eu member states this article i presents an analysis of the current situation on the photovoltaic market in greece and attempts to segment this market ii investigates the existing incentives policy as well as the crucial barriers for the wide dissemination of the photovoltaic applications and iii records the market actors aspects and predictions for the future furthermore in order to supply essential information for business development the current investment and legislative framework is presented

hedging in the possible presence of unspanned stochastic volatility evidence from swaption markets this paper examines whether higher order multifactor models with state variables linked solely to underlying libor swap rates are by themselves capable of explaining and hedging interest rate derivatives or whether models explicitly exhibiting features such as unspanned stochastic volatility are necessary our research shows that swaptions and even swaption straddles can be well hedged with libor bonds alone we examine the potential benefits of looking outside the libor market for factors that might impact swaption prices without impacting swap rates and find them to be minor indicating that the swaption market is well integrated with the libor swap market

term structure movements and pricing interest rate contingent claims this paper derives an arbitrage free interest rate movements model ar model this model takes the complete term structure as given and derives the subsequent stochastic movement of the term structure such that the movement is arbitrage free we then show that the ar model can be used to price interest rate contingent claims relative to the observed complete term structure of interest rates this paper also studies the behavior and the economics of the model our approach can be used to price a broad range of interest rate contingent claims including bond options and callable bonds

the future of the feed in tariff fit scheme in europe the case of photovoltaics abstract the key objective of this study is the examination of the regulatory and policy framework of the feed in tariff fit scheme specifically its effect on both the electricity pricing as well as the local and european renewable energy sources res market and accordingly the definition of its feasibility as a scheme for the further development and promotion of renewable energy technologies rets this work discusses the fit scheme implementation for photovoltaics pvs in four case study countries denmark germany cyprus and spain a model describing the conditions under which a fit scheme is led to collapse is also introduced and a parametric analysis towards revealing the sensitivity of the different parameters affecting it is delivered the study concludes with significant policy implications that should be considered for future implementation of the scheme for the prevention of the collapse of the scheme the tariff s value ought to be determined by each country s government based on a set of influencing factors including the operational capital and investment costs of each ret the standard cost of renewable energy re generation and the avoidance cost which would be regularly reviewed depending on the excess of the annual capacity

spreading currency forwards why and how abstract in this paper we have adopted a continuous time framework in which a hedger has a currency risk sensitive non traded cash position the hedger has the opportunity to hedge against risk by using two currency forward contracts that differ only in their maturities the hedger is able to reach a perfect hedge of his non traded position by using only two currency forward contracts with different maturities even though four sources of uncertainty drive the international economy this perfect hedge is reached by spreading forward contracts where the hedger is short in the nearby contract and long in the deferred contract this strategy is easy to implement since no parameter has to be estimated empirically when the hedger is a price taker finally the analysis has been extended to currency futures contracts we show in explicit terms how the marking to market of futures positions affects the spreading strategy

horizon problem and firm innovation the influence of ceo career horizon exploitation and exploration on breakthrough innovations abstract building on labor market evaluations and legacy conservation motivation perspectives we propose a mechanism to explain the relationship between ceo career horizons and breakthrough innovations using 10 year panel data from 681 u s firms we find that firms that have a ceo with a short career horizon tend to produce fewer breakthrough innovations we also find that the relationship between ceo career horizon and breakthrough innovation is partially mediated by r d spending and also moderated by organizational learning behavior exploration vs exploitation this study highlights how a ceo s motivation to protect success in the short term affects the firm s innovativeness

the expansion of renewable energies and employment effects in germany the promotion of electricity produced from renewable energy is a high priority of the european union as well of its member states the german government wants to increase the share of renewable energies from about 5 to 12 by 2010 to attain this goal the german government has introduced compulsory compensation schemes for electricity produced from renewable energy fed into the public grid this paper examines the economic impact of this policy employing an econometric model particular emphasis was given to employment effects in general we distinguish two effects 1 an expansive effect resulting from additional investments and 2 a contractive effect resulting from an increase in the production cost of power the first effect will dominate during the first years and lead to an increase in employment of approximately 33 000 new jobs however the contractive effect will offset these gains and lead to a slightly negative employment balance by 2010

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

bond price dynamics and options this paper provides a closed form preference free means of valuing a european call option written on a default free pure discount bond investors may not agree upon a theory of the term structure but they will necessarily agree on equilibrium option values further these equilibrium option values may be obtained without recourse to numerical approximation default free pure discount bond prices were posited to follow a non standardized transformed brownian bridge process this specification implicitly incorporates the terminal constraint that the price of a default free pure discount bond equal its face value at maturity contingent claim valuation necessarily involves consideration of terminal constraints on the value of financial securities the brownian bridge specification permits an appropriate means of incorporating a number of such constraints therefore while this paper has considered only the application of the brownian bridge process to the valuation of debt options the introduction of this process may provide for many further financial applications

the doping effect of italian feed in tariffs on the pv market abstract in less than six years italy has become one of the leading markets for pv power plants and one of the countries in the world with the largest number of installations and installed peak power such a quick and large growth is due to a series of feed in tariff schemes that have been uncapped until 2012 as a matter of fact any size or any number of pv power plants could be installed during a period of three years since the feed in tariffs are not paid by national taxes but are charged on the electricity bills italian energy users are now due to pay each year a surcharge of 9 billion euros on their energy bills this paper aims at discussing this development by highlighting the benefits but also some significant drawbacks that the application of uncontrolled feed in tariffs has produced

time dependent variance and the pricing of bond options in this paper we develop a model for valuing debt options that takes into account the changing characteristics of the underlying bond by assuming that the standard deviation of return is proportional to the bond s duration the resulting model uses the bond price as the single state variable and thus preserves much of the simplicity and robustness of the black scholes approach the paper provides comparisons between option prices computed using this model and those using the black scholes and brennan and schwartz models the last decade has seen a dramatic increase in the volatility of bond markets leading to a growing interest in financial instruments that can be used to hedge this risk thus in the u s canada and the u k there has been a proliferation of new interest rate dependent securities such as bond futures options on bonds options on bond futures swap agreements and bonds with option features such as callability putability retractability and so forth with the development of these markets the problems of valuation and the derivation of the hedging strategies have become subjects of increasing importance to both practitioners and academics several valuation methods have been suggested in the literature but so far no consensus has emerged as to the best solution to these problems the simplest approach to the valuation of debt options and probably the most widely used in practice is the black scholes model 3 this method originally developed for the valuation of stock options assumes that the variance of the rate of return on the underlying security is constant while this assumption is plausible for common stocks it is clearly unreasonable for bonds with a finite maturity the distinctive feature of the problem of debt option valuation is that the characteristics of the underlying asset change over time because the price is constrained to converge to the face value of the bond at maturity a second drawback of the black scholes approach is that it assumes a constant short term interest rate an assumption that is clearly inconsistent with stochastic returns on bonds in spite of these problems the black scholes model has been frequently used in practice to value debt options because of its overwhelming simplicity in comparison with other available methods

integration of renewable energy sources in southeast europe a review of incentive mechanisms and feasibility of investments abstract incentivizing development and deployment of renewable energy sources res but also other low carbon technologies lct has been a successful way of promoting new technologies by creating a feasible investment case and making them competitive with traditional energy sources although different incentive mechanisms exist feed in tariffs have shown to be the best model for accelerating lct development guaranteeing producers preferential prices for the produced electricity over a period of time and enabling them access to the power network to sell inject produced electricity due to these benefits feed in tariff models are the most common model for stimulating res integration in southeast europe the paper reviews the current state of preferential tariffs for res in countries of southeast europe while some countries already have significant installed res capacity others are still in the planning stage the review shows that the amount of installed capacity of a specific technology has a strong impact on the support for the future projects for same technology this comprehensive review of legislative development supporting res as well as technologies preferred in different countries of the region is supported with feasibility assessment of investing in res using the example of two different technology projects wind and photovoltaic analysing the impact of the current tariffs on the return on investment for each country of the region

a path dependent approach to security valuation with application to interest rate contingent claims abstract the last two decades have witnessed a tremendous growth in the volume of assets and liabilities whose cash flows depend in a variety of ways on the path of interest rates some of these including floating rate notes and swap agreements contractually base cash flows on current and past interest rates and contain caps floors and other more complex features others including mortgages many corporate bonds and time deposits are fixed rate instruments that contain embedded options such as those to prepay call or withdrawal the irregular exercise of these options causes cash flows to vary as time proceeds and interest rates rise or fall this paper develops a state contingent claims technique for valuing such securities it is derived from the option based model of breeden and litzenberger 1978 using the transition matrix approach of banz and miller 1978 particular attention is paid to valuing so called path dependent securities whose contemporaneous cash flows depend on the historical path of interest rates as well as their current level a detailed example is provided in which an adjustable rate mortgage is valued under a variety of economic and security specific assumptions

an integrated pricing model for defaultable loans and bonds abstract in recent years credit risk has played a key role in risk management issues practitioners academics and regulators have been fully involved in the process of developing studying and analysing credit risk models in order to find the elements which characterize a sound risk management system in this paper we present an integrated model based on a reduced pricing approach for market and credit risk its main features are those of being mark to market and that the spread term structure by rating class is contingent on the seniority of debt within an arbitrage free framework we introduce issues such as the integration of market and credit risk the use of stochastic recovery rates and recovery by seniority moreover we will characterize default risk by estimating migration risk through a mortality rate actuarial based approach the resultant probabilities will be the base for determining multi period risk neutral transition probability that allow pricing of risky debt in the trading and banking book

hedging local volume risk using forward markets nordic case abstract with focus on the nordic electricity market this paper develops hedging strategies for an electricity distributor who manages price and volume risk from fixed price agreements on stochastic electricity load whereas the distributor trades in the spot market at area prices the financial contracts used for hedging are settled against the system price area and system prices are correlated with electricity load as are price differences in practice however this is often disregarded here we develop a joint model for the area price the system price and the load accounting for correlations and we suggest various strategies for hedging in the presence of local volume risk we benchmark against a strategy that ignores correlation and hedges at expected load as is common practice in the industry using data from 2013 and 2014 for two danish bidding areas we show that our best hedging strategy reduces gross loss by 5 8 and 13 6 and increases gross profit by 3 8 and 9 5 respectively although this is partly due to the inclusion of correlation we show that performance improvement is mainly driven by the choice of risk measure

pricing derivatives on financial securities subject to credit risk this article provides a new methodology for pricing and hedging derivative securities involving credit risk two types of credit risks are considered the first is where the asset underlying the derivative security may default the second is where the writer of the derivative security may default we apply the foreign currency analogy of jarrow and turnbull 1991 to decompose the dollar payoff from a risky security into a certain payoff and a spot exchange rate arbitrage free valuation techniques are then employed this methodology can be applied to corporate debt and over the counter derivatives such as swaps and caps the purpose of this article is to provide a new theory for pricing and hedging derivative securities involving credit risk two sources of credit risk are identified and analyzed the first is where the asset underlying the derivative security may default paying off less than promised this is the case for example with imbedded options on corporate debt the second is the credit risk introduced by the writer of the derivative security who may also default examples include over the counter writers of options on eurodollar futures swaps and swaptions for pricing derivative securities involving credit risk there are currently two approaches the first views these derivatives as contingent claims not on the financial securities themselves but as compound options on the assets underlying the financial securities this is the case for example with the pricing of imbedded options on corporate debt see merton 1974 1977 black and cox 1976 ho and singer 1982 chance 1990 and kim ramaswamy and sundaresan 1993 or the pricing of vulnerable options see johnson and stulz 1987 in practice however this valuation methodology is difficult to use first the assets underlying the financial security are often not tradeable and therefore their values are not observable this makes application of the theory and estimation of the relevant parameters problematic second as in the case of corporate debt all of the other liabilities of the firm senior to the corporate debt must first and simultaneously be valued this generates significant computational difficulties as a result this approach has not

risk management of non maturing liabilities abstract risk management of non maturing liabilities is a relatively unstudied issue of significant practical importance non maturing liabilities include most of the traditional deposit accounts like demand deposits savings accounts and short time deposits and form the basis of the funding of depository institutions therefore the asset and liability management of depository institutions depends crucially on an accurate understanding of the liquidity risk and interest rate risk profile of these deposits in this paper we propose a stochastic three factor model as general quantitative framework for liquidity risk and interest rate risk management for non maturing liabilities it consists of three building blocks market rates deposit rates and deposit volumes we give a detailed model specification and present algorithms for simulation and calibration our approach to liquidity risk management is based on the term structure of liquidity a concept which forecasts for a specified period and probability what amount of cash is available for investment for interest rate risk management we compute the value the risk profile and the replicating bond portfolio of non maturing liabilities using arbitrage free pricing under a variance minimizing measure the proposed methodology is demonstrated by means of a case study the risk management of savings accounts

currency option pricing with mean reversion and uncovered interest parity a revision of the garman kohlhagen model abstract we consider a model for the pricing of currency options where the logarithm of the exchange rate exhibits mean reversion i e follows the omstein uhlenbeck process we mention reasons why exchange rates could exhibit mean reversion the domestic and foreign short interest rates are related to the logarithm of the exchange rate through uncovered interest parity under these assumptions we derive formulas for the value of a european currency option from the point of view of both domestic and foreign investors we also derive formulas for options on forward and futures contracts we compare option values computed by means of the garman kohlhagen model with corresponding results from our model it appears that our model cannot explain all instances of mispricing of currency options by the garman kohlhagen model which have been reported by previous authors the main virtue of our paper however is that we derive a simple model which incorporates clear theoretical relationship between the exchange rate and the domestic and foreign interest rates

an assessment of the greek incentives scheme for photovoltaics abstract after two years of elaboration a new legislation was enacted in 2006 in greece providing an appealing feed in tariff fit scheme for photovoltaics pvs the response of the market was immediate with more than 7947 licenses having been submitted in less than 2 years time the effectiveness however of an incentives scheme cannot be judged solely by the response of prospective investors aim of this paper is to present and discuss a quantitative assessment of this newly introduced fit law in greece with respect to its attractiveness to investors its effectiveness towards launching a new market its cost efficiency and its ability to lift non economic barriers that led to significant delays in the diffusion of res over the last 10 years

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

on the feasibility of arbitrage based option pricing when stochastic bond price processes are involved abstract there are many options which are based on interest rate sensitive assets for example debt options and currency options are best priced when a stochastic bond price process is included however not all stochastic bond price processes are feasible for use in pricing options by standard arbitrage techniques this work draws on the results of harrison and kreps j econ theory 20 1979 381 408 and relates them to pricing in the presence of stochastic bond price processes examples of feasible and infeasible bond price processes are given

single factor heath jarrow morton term structure models based on markov spot interest rate dynamics this paper considers the class of heath jarrow morton term structure models where the spot interest rate is markov and the term structure at time t is a function of time maturity and the spot interest rate at time t a representation for this class of models is derived and i show that the functional forms of the forward rate volatility structure and the initial forward rate curve cannot be arbitrarily chosen i provide necessary and sufficient conditions indicating which combinations of these functional forms are allowable i also derive a partial differential equation representation of the term structure dynamics that does not require explicit modeling of both the market price of risk and the drift term for the spot interest rate process using the analysis presented in this paper a class of intertemporal term structure models is derived

a monte carlo approach for the american put under stochastic interest rates abstract this paper presents a new approach for the valuation of an american put option under stochastic interest rates the paper combines a monte carlo simulation approach for the valuation of bermudan options and the valuation technique for american options proposed by geske and johnson 1984 the american put option valued analytically journal of finance 39 5 1511 1524 numerical results show that the price estimates are accurate with very low standard errors the simulation algorithm used to generate the price estimates is fast and easy to implement the effect of stochastic interest rates is clearly reflected in the option prices especially under regimes where interest rate volatility is high this effect can be important to incorporate also for long lived options this can be an important extension

selective hedging in hydro based electricity companies abstract we analyze risk management trends in electricity commodity markets using the production and transaction data and written hedging policies of 12 norwegian hydropower companies the scope of our analysis is the hedging of physical electricity production using the power derivatives available at nasdaq omx commodities in their hedging policy these companies either use a cashflow at risk c far approach or a hedge ratio approach or follow no explicitly stated approach we find that the derivative cashflows constitute substantial profits for these companies furthermore hedging contributes to reducing the c far for 10 of the companies these findings are surprising considering that we expect hedging to yield zero expected profit and to smooth the earnings overall our findings reveal that a practice of incorporating market views in hedging decisions is widespread in the sample companies as both sanctioned in their written hedging policy and as indicated by the substantial hedging profits

dynamic models of the term structure in the past 25 years tremendous progress has been made in modeling the dynamics of the term structure of interest rates which play an instrumental role in determining prices and hedging portfolios of fixed income derivative securities this article reviews the theoretical development of the dynamic models of the default free term structure and their applications in pricing interest rate options classic models sometimes termed equilibrium models and their multifactor extensions are outlined these models provide clear economic intuitions connecting the term structure with economic fundamentals they also lay a foundation for the framework of the arbitrage models that price interest rate derivatives on the basis of the market prices of bonds this framework has been expanded and enriched by recent advances in directly modeling observable market rates through the market models and in incorporating an internally consistent correlation structure through the infinite dimensional models

bond pricing and the term structure of interest rates a discrete time approximation this paper studies the binomial approximation to the continuous trading term structure model of heath jarrow and morton 1987 the discrete time approximation makes the original methodology accessible to a wider audience and provides a computational proce dure necessary for calculating the contingent claim values derived in the continuous time paper this paper also extends and generalizes ho and lee s 1986 model to include multiple random shocks to the forward rate process and to include an analysis of continu ous time limits the generalization provides insights into the limitations of the existing empirical implementation of ho and lee s model

dynamic asset allocation portfolio decomposition formula and applications a new decomposition of the optimal portfolio in dynamic models with von neumann morgenstern preferences and ito prices is established the formula rests on a change of numeraire that uses pure discount bonds as units of account the dynamic hedging demand has two components the first hedge insures against fluctuations in an optimally designed bond with a maturity date matching the investor s horizon the second hedge immunizes against fluctuations in the market price of risk in the bond numeraire various applications are examined new results concerning the behavior of extremely risk averse individuals the demand for bonds and its long horizon limit and the optimal portfolio in incomplete markets are derived the author 2009 published by oxford university press on behalf of the society for financial studies all rights reserved for permissions please email journals permissions oxfordjournals org oxford university press

a penny for your quotes patent citations and the value of innovations the use ofpatents in economic research has been seriously hindered by the fact that patents vary enormously in their importance or value and hence simple patent counts cannot be informative about innovative output the purpose of this article is to put forward patent counts weighted by citations as indicators of the value of innovations thereby overcoming the limitations of simple counts the empirical analysis of a particular innovation computed tomography scanners indeed shows a close association between citation based patent indices and independent measures of the social value of innovations in that field moreover the weighting scheme appears to be nonlinear increasing in the number of citations implying that the informational content of citations rises at the margin as in previous studies simple patent counts are found to be highly correlated with contemporaneous rd however here the association is within afield over time rather than cross sectional

pricing of long dated commodity derivatives do stochastic interest rates matter abstract does modelling stochastic interest rates beyond stochastic volatility improve pricing performance on long dated commodity derivatives to answer this question we consider futures price models for commodity derivatives that allow for stochastic volatility and stochastic interest rates and a correlation structure between the underlying variables we examine the empirical pricing performance of these models on pricing long dated crude oil derivatives estimating the model parameters from historical crude oil futures prices and option prices we find that stochastic interest rate models improve pricing performance on long dated crude oil derivatives when the interest rate volatility is relatively high furthermore increasing the model dimensionality does not tend to improve the pricing performance on long dated crude oil option prices but it matters for long dated futures prices we also find empirical evidence for a negative correlation between crude oil futures prices and interest rates that contributes to improving fit to long dated crude oil option prices

the solar photovoltaic feed in tariff scheme in new south wales australia solar photovoltaic pv electricity systems are part of australia s energy supply matrix in the case of new south wales nsw the state government has had to deal with a complex policy problem in order to play its role in the federal small scale renewable energy scheme the nsw government initiated the 7 year solar bonus scheme in 2010 however in attempting to maximise community investment in small scale solar pv systems it relied on faulty financial modelling that applied a generous feed in tariff fit and underestimated the level of investor participation and installed capacity consequently the scheme has resulted in very high public costs that will require policy changes that bring investors and energy retailers into conflict and unpopular electricity retail price adjustments this paper uses a structured case and stakeholder analysis to critically analyse the fit policy while also highlighting important lessons for policymakers engaging in fit design

a cyclical square root model for the term structure of interest rates this paper presents a cyclical square root model for the term structure of interest rates assuming that the spot rate converges to a certain time dependent long term level this model incorporates the fact that the interest rate volatility depends on the interest rate level and specifies the mean reversion level and the interest rate volatility using harmonic oscillators in this way we incorporate a good deal of flexibility and provide a high analytical tractability under these assumptions we compute closed form expressions for the values of different fixed income and interest rate derivatives finally we analyze the empirical performance of the cyclical model versus that proposed in cox et al 1985 and show that it outperforms this benchmark providing a better fitting to market data

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

electricity forward curves with thin granularity theory and empirical evidence in the hourly epexspot market we propose a constructive definition of electricity forward price curve with cross sectional timescales featuring hourly frequency on the curve is jointly consistent with both risk neutral market information represented by baseload and peakload futures quotes and historical market information as mirrored by periodical patterns exhibited by the time series of day ahead prices from a methodological standpoint we combine nonparametric filtering with monotone convex interpolation such that the resulting forward curve is pathwise smooth and monotonic cross sectionally stable and time local from an empirical standpoint we exhibit these features in the context of epex spot and eex derivative markets we perform a backtesting analysis to assess the relative quality of our forward curve estimate compared to the benchmark market model of benth koekebakker and ollmar 2007

use of economic instruments in the german renewable electricity policy this article surveys the economic instruments adopted in germany since the start of the previous decade and analyse the factors determining their effectiveness it is found out that their effect has always diminished in correspondence of increased uncertainty on the future of the system in particular while in two of these instances uncertainty was mainly due to national factors in the other the debate on the european renewable directive played a very important role recent changes in the production incentives have introduced a process simulating the effect of competition among renewable generators it is pointed out that the biennial revision of the rates can increase the uncertainty intrinsic in the policy on the other hand this process also provides a forum for the debate on the future of the renewable sector one can notice that currently germany the biggest renewable market in europe is granting one of the lowest production incentives this is rather curious as germany never relied on market competition in order to increase the renewable electricity production

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

the arbitrage free valuation and hedging of demand deposits and credit card loans abstract using a market segmentation argument this paper uses the interest rate derivative s arbitrage free methodology to value both demand deposit liabilities and credit card loan balances in markets where deposits loan rates may be determined under imperfect competition in this context these financial instruments are shown to be equivalent to a particular interest rate swap where the principal depends on the past history of market rates solutions are obtained which are independent of any particular model for the evolution of the term structure of interest rates

determination of the adequate capital for default protection under the one factor gaussian term structure model abstract in practice credit risk is measured by one of the two different methodologies one measures the prices and sensitivities of the credit linked instruments another measures the required collateral or capital needed to cover a potential default loss this paper introduces a pricing methodology which also determines the required capital conventionally the value at risk method is used to determine collateral requirements artzner et al demonstrated that the resulting adequate capital measures may fail to capture the credit diversification effect which is critical in credit risk management cf artzner p delbaen f eber j m heath d 1997 definition of coherent measures of risk paper presented at the symposium on risk management european finance association vienna august 27 30 in order to overcome this problem this paper introduces a new approach which combines closed form solutions and the hull white trinomial tree this combined approach is computationally faster than a naively implemented monte carlo based var methodology the pricing model is based on the rating based gaussian term structure model developed by nakazato this approach is applicable to a wide variety of credit derivatives and their portfolios in a coherent fashion in this paper however attention is concentrated on determining the collateral requirement for the counter party risk when there is the risk of credit rating change on an issue and also risk of default on that issue or on any protection already written on the issue

dynamic capabilities and new product development in high technology ventures an empirical analysis of new biotechnology firms abstract in industries populated by entrepreneurial high technology firms the rapid development of new products is viewed as a key determinant of success developing a portfolio of new products is necessary to gain early cash flows external visibility and legitimacy early market share and increase the likelihood of survival schoonhoven eisenhardt and lymman 1990 in addition recent research has shown that new product development improves a firm s ability to raise money through an initial public offering deeds decarolis and coombs 1997 this paper develops a model of new product development which is tested on a sample of 94 pharmaceutical biotechnology companies we hypothesize that new product development capabilities are a function of a firm s scientific technological and managerial skills to test this relationship we develop several firm specific measures in an attempt to triangulate in on the core construct of firm specific new product development capabilities some important implications for entrepreneurs managers of high technology firms flow from our results first entrepreneur managers need to view the choice of geographic location as an important strategic decision which will impact their firm s access to the skilled technical personnel and the streams of knowledge our results indicate that a choice location has a significant concentration of similar firms but the level has not yet reached a point where competition for resources in the local environment offsets any advantages of the location in the case of biotechnology this would seem to indicate that the prime locations would be expanding areas such as san diego seattle and philadelphia rather then the established locations of silicon valley and boston second as scientific knowledge plays an ever more important role in a firm s success the quality of the firm s scientific team is a critical ingredient in a firm s new product development capability but how do you evaluate the quality of scientific personnel our results indicate that there is a strong positive relationship between the impact as measured by citations of a team s prior research in the academic community and the productivity of that team in a commercial research laboratory therefore the judgement of a scientific field captured by citations or perhaps expert judgement should prove to be a useful tool when evaluating personnel for a firm s research team third the results from our measures of ceo experience and the percentage of the top management team with a ph d are interesting as expected the prior experience of ceo in managing a commercial research facility enhances a firm s new product development capabilities however results for our top management team variable appears to indicate that the over reliance on technical personnel in the management of the organization detracts from the product development process taken together these results seem to imply that it is important that the leadership of the organization have knowledge of and experience in managing the new product development process but that diverting the firm s scientific personnel s energies away from the laboratory and into the management of the organization maybe counter productive therefore what a high technology venture appears to need is leadership that understands and has experience in the new product development process but which is separate and distinct from the scientific team this type of leadership keeps the scientific team focused on research and development and out of the boardroom

pricing interest rate derivatives a general approach the relationship between affine stochastic processes and bond pricing equations in exponential term structure models has been well established we connect this result to the pricing of interest rate derivatives if the term structure model is exponential affine then there is a linkage between the bond pricing solution and the prices of many widely traded interest rate derivative securities our results apply to m factor processes with n diffusions and l jump processes the pricing solutions require at most a single numerical integral making the model easy to implement we discuss many options that yield solutions using the methods of the article

strips of hourly power options approximate hedging using average based forward contracts we study approximate hedging strategies for a contingent claim consisting of a strip of independent hourly power options the payoff of the contingent claim is a sum of the contributing hourly pa