a spatial mean variance mip model for energy market risk analysis the paper presents a short term market risk model based on the markowitz mean variance method for spatial electricity markets the spatial nature is captured using the correlation of geographically separated markets and the consideration of wheeling administration the model also includes transaction costs and other practical constraints resulting in a mixed integer programming mip model the incorporation of those practical constraints makes the model more attractive than the traditional markowitz portfolio model with continuity a case study is used to illustrate the practical application of the model the results show that the mip portfolio efficient frontier is neither smooth nor concave the paper also considers the possible extension of the model to other energy markets including natural gas and oil markets

mean variance utility functions and the demand for risky assets an empirical analysis using flexible functional forms in a recent study levy and markowitz 15 demonstrate that at least for some utility functions expected utility can be approximated by a judiciously chosen function defined over mean and variance in addition to resurrecting mean variance analysis from the limbo into which it was placed by the criticisms of borch 10 and others the analysis by levy and markowitz yields a more direct approach to portfolio analysis than that provided by the current empirical literature the current portfolio literature is concerned with notions of efficient sets and systematic risk rather than with utility functions and mean variance while much has been gained from a utility free methodology it is ultimately predicated upon a separation theorem and hence an environment with zero transactions costs but security markets are not costless and the separation theorem may not hold in that event a utility dependent approach to portfolio analysis could potentially lead to more powerful results especially if such an approach could be empirically implemented

how does background risk affect portfolio choice an analysis based on uncertain mean variance model with background risk abstract this paper explores how background risk affects individual investment decisions under the framework of uncertainty theory we propose an uncertain mean variance model with background risk and give its optimal solution when the returns of stocks and background asset obey normal uncertainty distributions on this basis we study the characteristic of the mean variance efficient frontier of the stock portfolio in the presence of background risk furthermore we compare the proposed model with the uncertain mean variance model without background risk and discuss the efficiency difference between the two models and further give the condition where the two models select the same stocks based on the comparison we analyze how background risk affects individual portfolio choice finally we give some numerical examples as illustrations

imported inputs real wage rigidity and devaluation in the small open economy abstract this paper examines the effects of devaluation upon employment in a tradables nontradables model of the small open economy where there is a rigid real wage and imports consist of both intermediate inputs and final goods it is shown that in general economies importing intermediates are not more prone to contraction than those importing only consumption goods a new reason is also uncovered as to why the existence of an initial trade balance deficit increases the likelihood that devaluation will be contractionary

medium term power planning with bilateral contracts this paper addresses the optimal management of hydropower resources on medium term the objective is to maximize the expected revenue of a producer and the decision variables are generation and forward contracts in each period for each scenario stochastic linear and nonlinear programming has been used as a framework for modeling and solution results are exposited for a norwegian power producer participating in nord pool the nordic power exchange

forward contracts for the operation of an electricity industry under spot pricing a study is reported of the use of forward contracts as risk instruments for electricity industries operating under spot pricing forward contracts involve financial transactions or commitments which relate to a physical trade at a later time instance price setting and appropriate participant responses are discussed simulation studies are used to demonstrate that forward contracts offer participants an opportunity to reduce their risk exposure without removing the incentive to respond to higher spot prices

financial risk management in a competitive electricity market this paper proposes solutions for electricity producers in the field of financial risk management for electric energy contract evaluation the efficient frontier is used as a tool to identify the preferred portfolio of contracts each portfolio has a probability density function for the profit for important scheduling policies closed form solutions are found for the amount of futures contracts that correspond to the efficient frontier production scheduling must consider resource constraints it is found that without resource constraints the portfolio with the highest expected profit can be preferred even for a risk averse decision maker when resource constraints are present portfolios not corresponding to the maximum expected profit criteria will more frequently be preferred

delta hedging strategies comparison abstract in this paper we implement dynamic delta hedging strategies based on several option pricing models we analyze different subordinated option pricing models and we examine delta hedging costs using ex post daily prices of s p 500 furthermore we compare the performance of each subordinated model with the black scholes model

genco s integrated trading decision making to manage multimarket uncertainties fossil fuel generation companies gencos trade in multiple uncertain energy markets fuel and carbon markets on upstream side while electricity market on downstream side global economic and environmental benefits lead these markets to pursue overlapping goals making them highly interactive gencos may identify optimal trading strategies for upstream and downstream trading in an integrated framework to manage an overall secure and profitable position further severe unpredictability of energy market prices may necessitate a genco to make trading plans which perform better meeting its goals under severe uncertainty of involved markets this paper proposes information gap decision theory igdt based approach to select three interrelated trading portfolios in an integrated framework results from a realistic case study provide a comprehensive decision insight to address risk averse and risk seeking behavior of genco explicitly highlighting importance of co variation in prices of interactive markets

benchmarking portfolio insurance and technical analysis a monte carlo comparison of dynamic strategies of asset allocation abstract this paper makes an extensive simulation comparison of popular dynamic strategies of asset allocation for each strategy alternative measures have been calculated for risk return and risk adjusted performance sharpe ratio sortino ratio return at risk moreover the strategies are compared in different market situations bull bear no trend markets and with different market volatility taking into account transaction costs and discrete rebalancing of portfolios the simulations show a dominant role of constant proportion strategies in bear and no trend markets and a preference for benchmarking strategies in bull markets these results are independent of the volatility level and the risk adjusted measure adopted

pitfalls in the measurement of real exchange rate effects on agriculture abstract studies of the effects of real exchange rates on agriculture commonly assume that these effects can be identified as those which pertain to traded goods in the standard australian model of an open economy further it is common to assume that the indirect effects of changes in the real exchange rate have the same impact on the various production activities within agriculture this paper discusses the extent to which these stylized facts reflect reality focusing in particular on the extent of tradibility in agricultural markets the irrelevance of results based on free trade equilibria to policy analyses and the importance of the characteristics of crop production functions in estimating the effects of real exchange rate changes ignoring these considerations can cause errors in the measurement of policy effects on agricultural incentives

quantifying the risk to crude oil imports in china an improved portfolio approach abstract china s rapid economic development caused a sharp increase in crude oil demand in 2011 china imported 254 million tons of crude oil in total with its dependence on imported oil reaching 56 5 this paper carries out a quantitative study on the risk of china s crude oil imports by establishing an assessment model which has two primary characteristics first the model not only uses portfolio theory to assess the risk to china s crude oil imports taking into consideration the effect of the diversified sources of imports but also introduces a correlation coefficient which considers the risks associated with importing oil from oversea sources second the correlation between import prices and global oil prices is analyzed with respect to each exporting country the ease of doing business index grading system is introduced in order to represent the risk weight for each exporting country because of these improvements the model provides operable methods for studying how global oil prices import volumes the diversification index and the political and economic situation of the exporting countries affects china s crude oil import risks as well as offers a method for implementing optimal crude oil import strategies it is concluded that china s crude oil import risks associated with the middle east are not as precarious as researchers traditionally reported among countries in the middle east there exist obvious disparities and differences affecting the kinds and types of risks involved therefore these risks should be treated piecemeal when performing an overall assessment of crude oil import risks in china it should also be noted that with respect to the middle east there is still room for china to optimize the mix of source countries in order to reduce risks china should raise the volume of imports coming from low risk countries as well as add new low risk exporting countries to its importing portfolio

the elasticity of substitution in india s manufacturing sector abstract using cross section data and the translog cost function this paper examines the substitution possibilities between capital and materials and labor and materials since raw materials might be used to overcome the bottlenecks caused by shortages of physical capital and skilled labor three significant conclusions are a since materials are substitutable for both capital and labor to a considerable extent capital and skilled labor may not be a binding constraint on growth agricultural materials expansion may substitute for these inputs and lead to expansion in the industrial sector b fixed proportion models are not warranted in india without modification and c separability tests showed that materials must be included in the production function

on the mean variance tradeoff in option replication with transactions costs this paper analyzes the tradeoff between cost and risk of discretely rebalanced option hedges in the presence of transactions costs i present closed form solutions for expected hedging error transactions costs and variance of the cash flow from a time based hedging strategy similar to that analyzed by leland 1985 furthermore i characterize the cost and risk of a move based hedging strategy without resorting to monte carlo simulations all results are sufficiently general to accommodate the use of a transactions costs adjusted hedging volatility and an asset rate of return that differs from the risk free rate of return

option replication in discrete time with transaction costs option replication is discussed in a discrete time framework with transaction costs the model represents an extension of the cox ross rubinstein binomial option pricing model to cover the case of proportional transaction costs the method proceeds by constructing the appropriate replicating portfolio at each trading interval numerical values of these prices are presented for a range of parameter values the paper derives a simple black scholes type approximation for the option prices with transaction costs and demonstrates numerically that it is quite accurate for plausible parameter values

optimal price and quantity determination for retail electric power contracts considering the viewpoint of a retailer this paper analyzes the problem of setting up contracts on both the supplier and end user sides to maximize profits while maintaining an acceptable level of settlement risk the proposed stochastic optimization model can assist retailers with these efforts and guide them in their contractual arrangements a realistic example illustrates the capabilities of the methodology proposed

optimal algorithms and lower partial moment ex post results portofolio management in the finance literature has typically used optimization algorithms to determine security allocations within a portfolio in order to obtain the best trade off between risk and return these algorithms despite some improvements are restrictive in terms of an investor s risk aversion utility function since individual investors have different levels of risk aversion this paper proposes two portfolio optimization algorithms that can be tailored to the specific level of risk aversion of the individual investor and performs ex postevaluation tests of the algorithm performance

government policy real wage resistance and the resolution of conflict a theory of bargaining with k players is proposed to reconcile the multitude of conflicting interests in an econometric model this nash strategy corresponds to a non zero sum differential dynamic game and is established either by rational anticipation of finite conflict or pre play round table discussion the theory is illustrated with an analysis of conflict between government trade unions and entrepreneurs all results are calculated from a large scale multisectoral dynamic model of the u k economy developed by the cambridge growth project

the effects of transaction costs and different borrowing and lending rates on the option pricing model a note this paper modifies the black scholes option pricing model to include the effects of transaction costs and different borrowing and lending rates the paper demonstrates that these market imperfections tend to offset each other yielding a bounded range of prices for each option the paper also shows that under some conditions the option pricing hedge may be society s lowest cost financial intermediary

the pricing of convexity risk and timedecay in options markets abstract option valuation formulas typically assume all risk can be eliminated in a continuously rebalanced hedge but convexity of the option pricing function and time decay cause risk in real world hedges we find strong evidence in stock options transactions data from periods 10 years apart that the market prices these risks there is a significant price effect associated with convexity that becomes larger immediately following a period of larger stock price movements although time decay is highly correlated with convexity a multiple regression including both factors shows it to have a significant independent effect the results from the two sample periods are highly consistent as are pre and post crash results from the year 1987

the use of risk and return models for multiattribute decisions with decomposable utilities normatively oriented approaches to decision making under uncertainty occupy a major portion of the literature of decision analysis among the proposed approaches the von neumann morgenstern expected utility eu theory has been the most prominent model of rational choice despite some controversies that surround this model with respect to its descriptive ability as well as the plausibility of utility assessment in actual decision situations 6 10 although most applications of the eu model have been concerned with decisions involving monetary outcomes its scope is not limited to any particular class of conse quences the basic appeal of the model is attributable partly to its generality in this regard and more importantly to the apparent reasonableness of its preferentialaxioms in the context of decisions with monetary outcomes several alternatives to the eu model have been proposed including the mean variance and mean semivariance models that have found popularity in the economies and finance litera ture see 4 8 and 9 in contrast to the eu theory where a decision maker s preferences among uncertain prospects are assumed given preferences in these models are formulated in terms of two attributes that are presumed to character ize all available choices in the mean semivariance model for example uncer tain prospects are viewed entirely in terms of their means and below target semivariances a generalization of this model was examined by fishburn 2 who showed that the general mean risk model exhibits a certain degree of compatibility with the eu model more recently holthausen 5 showed that this compatibility is significantly enhanced when mean is replaced by a return measure de fined as a probability weighted function of above target deviations specifically holthausen proved that this model yields the same preferences as the eu model whenever the expected utility function has the form

rationality in extensive form games let us adopt the classical point of view that a theory of games is a description of rational behavior consequently equipped with a book entitled theory of games any individual in any strategic situation need only consult the book to make a rational decision one of the questions to address in this context is indeed whether or not strategies other than those provided by backward induction can ever appear in such a book in offering an answer we shall also explore the logical limits within which any theory of games must operate

financial bilateral contract negotiation in wholesale electricity markets using nash bargaining theory bilateral contracts are important risk hedging instruments constituting a major component in the portfolios held by many electric power market participants however bilateral contract negotiation is a complicated process as it involves risk management strategic bargaining and multi market participation this study analyzes a financial bilateral contract negotiation process between a generation company and a load serving entity in a wholesale electric power market with congestion managed by locational marginal pricing nash bargaining theory is used to model a pareto efficient settlement point the model predicts negotiation outcomes under various conditions and identifies circumstances in which the two parties might fail to reach an agreement both analysis and simulation are used to gain insight regarding how these negotiation outcomes systematically vary in response to changes in the participants risk preferences and price biases

policy reform and labour demand in branches of sri lankan manufacturing industry many policy reforms in developing countries aim to remove factor market distortions whether such reforms reduce unemployment depends partly on the substitution possibilities between labour and other factors of production this paper examines labour demand in seven branches of sri lankan manufacturing industry using data on 4 digit industrial categories over the 1990 to 1997 period the box cox transformation is used to allow for flexible and data dependent elasticities the elasticity of capital labour substitution varies widely across the branches of industry and is usually variable rather than constant the average long run own wage elasticity of labour demand for the manufacturing sector is estimated as 0 80 so factor price policy should have an important effect on labour demand in this setting

downside versus symmetric measures of uncertainty in natural resource portfolio design to manage climate change uncertainty recent work uses markowitz s mean variance framework to identify efficient allocations of conservation activity across subregions of a planning landscape to minimize climate change induced uncertainty in future conservation benefits we replace variance with a downside measure of uncertainty and compare the resulting portfolios of conservation activity and uncertainty expected value results against those generated by the mean variance approach results illustrate that conservation agents can manage climate changed induced uncertainty in future conservation outcomes more efficiently using our framework when they are particularly averse to downside uncertainty and when predicted future conservation outcomes within subregions across their planning horizon exhibit skewed distributions

stochastic dominance vs mean variance portfolio analysis an empirical evaluation most of the work in portfolio theory in the past decade has been based on the principle of utility maximization where either the investor s utility function is assumed to be a second degree polynomial with a positive first derivative and a negative second derivative or the probability functions are assumed to be normal if at least one of these conditions holds it can be shown that choosing among risky assets on the basis of their mean and variance only is consistent with the von neumann morgenstern utility maximization model thus given the above assumptions the incorporation of higher moments of a distribution and the adoption of alternative approaches to portfolio selection have largely been ignored in favor of the more familiar mean variance approaches

optimal investment portfolio in renewable energy the spanish case abstract this article presents a model for investing in renewable energies in the framework of the spanish electricity market in a way that risk is minimised for the investor while returns are maximised the model outlined here is based on an economic model for calculating cash flows intended to obtain the internal rate of return irr of the different energies being studied wind photovoltaic mini hydro and thermo electrical the irrs obtained are considered the returns on investments while their standard deviations are considered associated risks in order to minimise risk a comprehensive portfolio of investments is created that includes all of the available energies by means of a system of linear equations the solution of the linear system is graphically checked using the efficient frontier method for the different financing options several case studies within the renewable energies plan per is its spanish abbreviation that is in force in spain in the period 2005 2010 are analysed in order to illustrate the method as are other case studies using different types of financing helping us to reach the pertinent conclusions

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

risk constrained self scheduling of a thermal power producer this paper addresses the self scheduling problem of a price taker power producer it focuses on risk modeling emphasizing the tradeoff existing between maximum profit and minimum risk the paper analyzes a self scheduling model that considers simultaneously profit and risk this model is formulated as a mixed integer quadratic programming problem which is solved using commercially available software relevant results from a realistic case study are discussed

risk forecasting models and optimal portfolio selection this study analyses from an investor s perspective the performance of several risk forecasting models in obtaining optimal portfolios the plausibility of the homoscedastic hypothesis implied in the classical markowitz model is dicussed and more general models which take into account assymetry and time varying risk are analysed specifically it studies whether arch type based models obtain portfolios whose risk adjusted returns exceed those of the classical markowitz model the same analysis is performed with models based on the lower partial moment lpm which take into account the assymetry in the distribution of returns the results suggest that none of the models achieve a clearly superior average performance it is also found that models based on semivariance perform as well as those based on the variance but not better than even if the evaluation criterion is based on the reward to semivariance ratio when attention turns to the analysis of worst case performance the results are clearly differ

money as a medium of exchange in an economy with artificially intelligent agents abstract we study the exchange economies of kiyotaki and wright 1989 in which agents must use a commodity or fiat money as a medium of exchange if trade is to occur our agents are artificially intelligent and are modeled as using classifier systems to make decisions in the assignment of credit within the classifier systems we introduce some innovations designed to study sequential decision problems in a multi agent environment for most economies that we have simulated trading and consumption patterns converge to a stationary nash equilibrium even if agents start with random rules in economies with multiple equilibria the only equilibrium that emerges in our simulations is the one in which goods with low storage costs play the role of medium of exchange i e the fundamental equilibrium of kiyotaki and wright

a review on risk constrained hydropower scheduling in deregulated power market in deregulated power market hydro producer has in principle no other objective than to produce electricity and sell with maximum profit with lower market risk attention must focus on profit uncertainty caused by uncertainty in spot prices and reservoir inflow the purpose of this review is to assess the state of the art in hydropower operations considering profit risk under uncertainty and consider future directions for additional research and application physical and financial tools to hedge risk in bilateral market and risk assessment methods are all discussed in detail furthermore production resources can also be used to manage risk to a certain extent this concept when be integrated with variety of risk management methods under stochastic optimal framework has operational significance for hydro producer participating in electricity market

transactions costs and portfolio choice in a discrete continuous time setting abstract this paper makes the following observation concerning a new formulation of the consumption and portfolio choice model of merton 1971 with transaction costs suppose an investor observes his or her current wealth only when making a transaction that transactions are costly and that decisions to transact can be made at any time based on all current information if at each transaction the agent is charged a fixed fraction of current portfolio value an optimal policy exists and the optimal interval of time between transactions is fixed independent of time and current wealth

electricity markets volatility estimates regularities and risk management applications the recent deregulation of the market for electric power in many parts of the us and canada has expanded the set of potential tools for managing the types of risks faced by both generators and consumers of electric power in particular manufacturing and other firms whose operations are powered by electricity now face on a continuing basis the engineering management decisions concerning whether they should buy or produce electricity and if they are to buy or sell electricity what types of contracts are optimum these types of risk management decisions typically involve futures forwards options and other financial derivatives the price and volatility of electric power are known to play an essential role in determining which of these instruments should be used however electricity as a commodity possesses certain special features not shared by other commodities and hence its risk properties are not yet well understood in this paper we consider and test certain hypotheses about the properties of electricity price using recent market data we find that electricity prices possess certain volatility and other systematic properties that can be characterized by the type and method of delivery of electricity these properties can be used by firms in formulating their optimal demand and supply schedules of electric power

forecasting the performance of hedge fund styles this article predicts the relative performance of hedge fund investment styles using time varying conditional stochastic dominance tests these tests allow for the construction of dynamic trading strategies based on nonparametric density forecasts of hedge fund returns during the recent financial turmoil our tests predict a superior performance for the global macro investment style compared with the other strategies of directional traders the dedicated short bias investment style is stochastically dominated by the other directional styles these results are confirmed by simple nonparametric tests constructed from realized excess returns further by utilizing a cross validation method for optimal bandwidth parameter selection we discover the factors that have predictive power regarding the density of hedge fund returns we observe that different factors have forecasting power for different regions of the returns distribution and more importantly that the fung and hsieh factors have power not only for describing the risk premium but also if appropriately exploited for density forecasting

an econometric estimation of hicksian and marshallian elasticities in indian manufacturing the knowledge of substitution possibilities between different factors of production is essential in evaluating the impact of public policies on productivity employment industrial growth and factor intensity since the advent of flexible functional forms in the early 1970s a large number of studies have estimated the ease of factor substitution however to date most of the empirical evidence on factor substitution is based on a cost function a drawback with the cost function

negotiating bilateral contracts in electricity markets in mixed pool bilateral electricity markets participants can sign forward bilateral contracts several months in advance of its delivery in addition generators may sell to and loads may buy from the pool at the spot price through the day ahead or balancing markets forward bilateral contracts have the advantage of price predictability in comparison with the uncertain spot price however the risk is that such a contract commits the partners to a price that may be disadvantageous compared to the spot price here we propose a systematic negotiation scheme through which a generator and load can reach a mutually beneficial and risk tolerable forward bilateral contract either physical or financial under this approach the generator and load respond rationally to a stream of bilateral bids counter bids and offers counter offers considering their respective benefits while accounting for the risks incurred by the prediction uncertainty in the pool spot price and other market parameters over the length of the contract each negotiating party can choose its own definition of risk which can be influenced by regret value at risk or dispersion from the mean numerical tests show that this flexible negotiating approach can be readily put into practice

portfolio applications in electricity markets review private investor and manager perspective trends abstract the private sector plays a major role in the expansion and operation of power systems in most countries especially those running liberalized electricity markets policymakers have the task of inducing private agents through their regulatory designs to make decisions that point toward social welfare maximization conversely it is a task of private agents to protect themselves against the risks of the sector including regulatory risks international fuel price uncertainty climate change policies natural resource availability electricity demand uncertainty co2 clearance prices etc instead of hiding all of these risks within the total project costs and losing competitiveness private agents can use diversification as a strategy to deal with them this paper presents a review of the main applications voids and challenges of portfolio optimization for two key agents of the private sector investors and managers the problem of the investor is to design a technology portfolio to invest in that maximizes its expected returns and limits risks while the manager has to design a portfolio of financial physical instruments long term contracts futures etc to sell buy electricity and hedge against price risks we have found two fundamental issues in the literature the first and most important is excessive confidence in historical data and statistical analysis for predicting future price behavior for a changing future in detriment of more structural analysis structural analysis can include particularities of modern power systems such as future transmission changes congestion operational constraints ramps new entrants new technologies and new demand grow patterns that cannot be taken into account by simply analyzing price historical values the second is the omission of renewable complementarities which is a proven characteristic of dispersed renewable plants that may have important risk mitigation effects although it has largely been ignored in portfolio analysis due to insufficient data modeling limitations and computational complexity

monetary policies in interdependent economies with stochastic disturbances a strategic approach western economies have become increasingly interdependent during recent years an important consequence of this is that the effects of macroeconomic policies within these economies have become more closely related a policy implemented in one country will generate effects abroad while the impacts of this policy on the domestic economy are modified by the behaviour and policies of the foreign economies with which it is interacting thus policy making in a multicountry context necessarily involves strategic behaviour analysis of strategic behaviour within the context of international macroeconomic policy began with the pioneering work of hamada 1976 who investigated this question under the assumptions of cournot and stackelberg behaviour his analysis is based on a fixed exchange rate regime and the objective function involves the tradeoff between inflation and the balance of payments more recently canzoneri and gray 1 985 consider alternative strategic monetary policies within the context of two economies subject to a mutual oil disturbance 1 this paper continues the analysis of strategic monetary policy the framework it employs is a two country stochastic macro model in which both economies are subjected to stochastic demand and supply shocks and expectations are rational 2 the policy makers in the two countries seek to optimise their respective objective functions which are taken to be functions of unanticipated movements in output and in the consumer price index the model begins by determining the usual cournot and stackelberg equilibria for this model however these represent just two possible equilibria and a number of alternatives are also considered in particular in the derivation of the cournot equilibrium each agent takes the behaviour of his opponent as given and therefore assumes that his rival does not react to his actions on the other hand each agent is shown to respond in accordance with a reaction function so that ex post the assumption of no response is incorrect by contrast we also consider a consistent conjectural variations equilibrium ccv in which each policy maker in determining his own actions correctly conjectures the response of his opponent the requirement of con

utility based option evaluation with proportional transaction costs abstract we examine the problem of finding investors reservation prices of european contingent claims in a continuous time finite horizon economy with proportional transaction costs we derive analytically numerous properties of reservation prices reflecting their dependency on the size of the option position the risk aversion and the initial wealth for the special case of hara utility functions we consider the so called marginal reservation prices i e unit reservation prices of infinitesimal positions of the contingent claim and prove that these are independent of the initial wealth and the parameters of the utility function except for the exponent furthermore we present numerical examples suggesting that the marginal reservation prices are for reasonable parameter values insensitive to the drift of the underlying security and the exponent of the hara utility function

the macroeconomics of trade liberalization abstract this paper analyzes the short run macroeconomic consequences of trade liberalization in ldcs it is shown that linkages between the tradables and nontradables sectors the effect of imported inputs on the economy s productive structure and certain patterns of factor substitution can go a long way toward explaining the perverse contractionary effects frequently seen in liberalization programs

investment behavior under knightian uncertainty an evolutionary approach abstract the as if view of economic rationality defends the profit maximization hypothesis by pointing out that only those firms who act as if they maximize profits can survive in the long run recently the problem of arriving at a logically consistent definition of rational behavior in games has shown that one must sometimes study explicitly the evolutionary processes that form the basis of this view the purpose of this paper is to investigate the usefulness of genetic programming as a tool for generating hypotheses about rational behavior in situations where explicit maximization is not well defined we use an investment decision problem with knightian uncertainty as a borderline test case and show that when the artificial agents receive the same information about the unknown probability distributions they develop behavior rules as if they were expected utility maximizers with bayesian learning rules

exploring efficiency differences over time in the spanish banking industry abstract over the last 15 years the competitive conditions under which spanish banking firms operate have become much tighter deregulation has affected both banks and savings banks allowing them to expand geographically and to choose less regulation conditioned output mixes this paper analyzes how in these circumstances banking efficiency has been affected considering two specifications of output and analyzing the dynamics of the entire distribution not only mean and standard deviation results differ depending on the output definition but they show that in general efficiency scores exhibit dynamic patterns that only two moments of the distribution hardly capture in particular regardless of the output definition considered efficiency scores were more dispersed in 1985 and more concentrated in 1995 and there were substantial changes in firms efficiency relative positions as measured by transition probability matrices in addition the multi modality of the distributions has almost disappeared at the end of the period

economic conflict and the solution of dynamic games abstract solution recommended for dynamic non cooperative games are approximate because of in incomplete allowance for the interdependencies over time and between players the mutual interdependence between agents is investigated in this paper approximate decision rules are compared to optimal decisions for conflicting income distribution goals in a standard macro economic policy problem the results indicate that simplified rules can induce substantial suboptimality and disequilibrium

optional forward contracts for electric power markets this paper extends the idea of callable forward contracts which are potentially useful as demand side interruptible load contracts to their supply side analogues together these contracts allow market participants to take advantage of flexibility in generation or consumption to obtain a monetary benefit while simultaneously removing the risk of market price fluctuations this paper also considers the effects of strategic behavior on the part of market participants in their contract sales purchase decisions

skewness preference and portfolio choice one of the virtues of parameter preference models presented in general form in rubinstein 23 is their empirical content applied models of financial theory rely heavily on the mean variance mv version of parameter preference as spelled out in samuelson 25 mv models are adequate with compact distributions of returns and when portfolio decisions are made frequently so that the risk parameter becomes sufficiently small

risk assessment in energy trading this paper provides a state of the art summary of risk assessment in energy trading techniques from financial engineering are needed by electric energy companies to manage price risk these tools are needed by suppliers distributors and traders in a competitive electric power marketplace tools that have been adapted to the specific environment of the electric power system include portfolio analysis and hedging instruments this paper provides a comprehensive critical literature survey of what has been applied to date in the power markets and which areas continue to need additional research one example market scenario is used throughout the paper to demonstrate the usefulness of the risk assessment methods

a decision support system based on particle swarm optimization for multiperiod hedging in electricity markets this paper proposes a particle swarm optimization pso approach to support electricity producers for multiperiod optimal contract allocation the producer risk preference is stated by a utility function u expressing the tradeoff between the expectation and variance of the return variance estimation and expected return are based on a forecasted scenario interval determined by a price range forecasting model developed by the authors a certain confidence level alpha is associated to each forecasted scenario interval the proposed model makes use of contracts with physical spot and forward and financial options settlement pso performance was evaluated by comparing it with a genetic algorithm based approach this model can be used by producers in deregulated electricity markets but can easily be adapted to load serving entities and retailers moreover it can easily be adapted to the use of other type of contracts

case based decision theory this paper suggests that decision making under uncertainty is at least partly case based we propose a model in which cases are primitive and provide a simple axiomatization of a decision rule that chooses a best act based on its past performance in similar cases each act is evaluated by the sum of the utility levels that resulted from using this act in past cases each weighted by the similarity of that past case to the problem at hand the formal model of case based decision theory naturally gives rise to the notions of satisficing decisions and aspiration levels

hedging options under transaction costs and stochastic volatility in this paper we consider the problem of hedging contingent claims on a stock under transaction costs and stochastic volatility extensive research has clearly demonstrated that the volatility of most stocks is not constant over time as small changes of the volatility can have a major impact on the value of contingent claims hedging strategies should try to eliminate this volatility risk we propose a stochastic optimization model for hedging contingent claims that takes into account the effects of stochastic volatility transaction costs and trading restrictions simulation results show that our approach could improve performance considerably compared to traditional hedging strategies

power portfolio optimization in deregulated electricity markets with risk management in a deregulated electric power system multiple markets of different time scales exist with various power supply instruments a load serving entity lse has multiple choices from these instruments to meet its load obligations in view of the large amount of power involved the complex market structure the risks in such volatile markets the stringent constraints to be satisfied and the long time horizon a power portfolio optimization problem is of critical importance for an lse to serve its load maximize its profit and manage its risks in this paper a midterm power portfolio optimization problem with risk management is presented key instruments are considered risk terms based on semi variances of spot market transactions are introduced and penalties on load obligation violations are added to the objective function to improve algorithm convergence and constraint satisfaction to overcome the inseparability of the resulting problem a surrogate optimization framework is developed enabling a decomposition and coordination approach numerical testing results show that our method effectively provides decisions for various instruments to maximize profit and manage risks and it is computationally efficient

option pricing and replication with transactions costs transactions costs invalidate the black scholes arbitrage argument for option pricing since continuous revision implies infinite trading discrete revision using black scholes deltas generates errors which are correlated with the market and do not approach zero with more frequent revision when transactions costs are included this paper develops a modified option replicating strategy which depends on the size of transactions costs and the frequency of revision hedging errors are uncorrelated with the market and approach zero with more frequent revision the technique permits calculation of the transactions costs of option replication and provides bounds on option prices

hedging with futures contracts in a deregulated electricity industry this paper is a statistical study of direct and cross hedging strategies using futures contracts in an electricity market a comparison of the strategies is based on the standard deviation or risk of the values of the hedging positions results indicate that the use of electricity futures contracts is superior to using other related futures contracts such as crude oil

varieties of agents in agent based computational economics a historical and an interdisciplinary perspective in this paper we trace four origins of agent based computational economics ace namely the markets origin the cellular automata origin the tournaments origin and the experiments origin along with this trace we examine how these origins have motivated different concepts and designs of agents in ace which starts from the early work on simple programmed agents randomly behaving agents zero intelligence agents human written programmed agents autonomous agents and empirically calibrated agents and extends to the newly developing cognitive agents psychological agents and culturally sensitive agents the review also shows that the intellectual ideas underlying these varieties of agents cross several disciplines which may be considered as a part of a general attempt to study humans and their behavior with an integrated interdisciplinary foundation

the american put under transactions costs abstract this paper examines the optimal super replication of american put options with physical delivery of the underlying asset such as stock options by means of a stock plus riskless asset portfolio the framework of the analysis is the binomial model with proportional transactions costs on stock transactions the paper extends the model for european options originally presented in merton geneva papers risk insurance 14 1989 225 and boyle and vorst j of finance 47 1992 271 and generalized in bensaid et al math finance 2 1992 63 the optimizing framework of this latter study is adapted to put options held by investors and perfectly hedged by a market maker and to put options written by investors and both held and hedged perfectly by a market maker it is shown that a unique optimal super replicating portfolio exists at every node of the binomial tree for the long option as well as for the short option when transactions costs are low

international policy design and the sustainability of policy bargains events of the past decade and the persistence of the worldwide recession have underlined the interdependence of the major economics competitive devaluations first illustrated the dangers of unilateral decisions and politicians have regularly called for concerted policies since the bonn economic summit in 1978 economic theory has shown that coordinated policies can bring gains but the question of whether those gains will be significant and how they will be distributed remains unanswered remarkably few empirical results on how interdependence should affect policy design or even on the signs of spillovers between economies have been produced this paper estimates the costs of uncoordinated policies to the us and eec economies and also the potential gains and risks in cooperation it focuses particularly on the process of determining rational policy bargains and whether in an international context such bargains are likely to be sustainable

profit margin hedging some extension economists and others recommend profit margin hedging as a way to choose the timing of crop sales however the theory behind this strategy recommendation is not well developed this article determines the producer s utility function and price processes where profit margin hedging is optimal profit margin hedging is shown to be an optimal strategy under a highly restricted target utility function even in an efficient market profit margin hedging is profitable if prices are mean reverting copyright 2010 oxford university press

dynamic hedging under jump diffusion with transaction costs if the price of an asset follows a jump diffusion process the market is in general incomplete in this case hedging a contingent claim written on the asset is not a trivial matter and other instruments besides the underlying must be used to hedge in order to provide adequate protection against jump risk we devise a dynamic hedging strategy that uses a hedge portfolio consisting of the underlying asset and liquidly traded options where transaction costs are assumed present due to a relative bid ask spread at each rebalance time the hedge weights are chosen to simultaneously i eliminate the instantaneous diffusion risk by imposing delta neutrality and ii minimize an objective that is a linear combination of a jump risk and transaction cost penalty function because reducing the jump risk is a competing goal vis a vis controlling for transaction cost the respective components in the objective must be appropriately weighted hedging simulations of this procedure are carried out and our results indicate that the proposed dynamic hedging strategy provides sufficient protection against the diffusion and jump risk while not incurring large transaction costs

stochastic dominance bounds on derivatives prices in a multiperiod economy with proportional transaction costs by applying stochastic dominance arguments upper bounds on the reservation write price of european calls and puts and lower bounds on the reservation purchase price of these derivatives are derived in the presence of proportional transaction costs incurred in trading the underlying security the primary contribution is the derivation of bounds when intermediate trading in the underlying security is allowed over the life of the option a tight upper bound is derived on the reservation write price of a call and a tight lower bound is derived on the reservation purchase price of a put these results jointly impose tight upper and lower bounds on the implied volatility

hedging demand and market intraday momentum hedging short gamma exposure requires trading in the direction of price movements thereby creating price momentum using intraday returns on over 60 futures on equities bonds commodities and currencies between 1974 and 2020 we document strong market intraday momentum everywhere the return during the last 30 minutes before the market close is positively predicted by the return during the rest of the day from previous market close to the last 30 minutes the predictive power is economically and statistically highly significant and reverts over the next days we provide novel evidence that links market intraday momentum to the gamma hedging demand from market participants such as market makers of options and leveraged etfs

real wage rigidity and optimal commercial policy in less developed countries abstract this paper examines optimal commercial policy in an ldc in which there is a rigid real wage and imports consist of both final and non competitive intermediae inputs the nature of optimal commercial policy depends sensitively upon the composition of imports when export promotion is hampered by import quotas abroad or difficulties in extending export subsidies protection will often be optimal in economies that import intermediates but not in economics that import only final goods the results for the full optimization case establish that there is a general presumption trade policy should be biased in favor of export promotion although there are well defined conditions under which an import substituting regime is optimal

performance evaluation of portfolio insurance strategies using stochastic dominance criteria abstract this paper evaluates the performance of the stop loss synthetic put and constant proportion portfolio insurance techniques based on a block bootstrap simulation we consider not only traditional performance measures but also some recently developed measures that capture the non normality of the return distribution value at risk expected shortfall and the omega measure we compare them to the more comprehensive stochastic dominance criteria the impact of changing the rebalancing frequency and level of capital protection is examined we find that even though a buy and hold strategy generates higher average excess returns it does not stochastically dominate the portfolio insurance strategies nor vice versa our results indicate that a 100 floor value should be preferred to lower floor values and that daily rebalanced synthetic put and cppi strategies dominate their counterparts with less frequent rebalancing

incomplete information income redistribution and risk averse median voter behavior this paper extends the median voter model to include risk aversion an expected utility maximizing median voter with an aversion to risk may behave differently than a median voter who is certain a referendum on income redistribution from the top of the distribution to the bottom which fails when the median voter is certain may pass in the extended median voter model economic inefficiencies and the net losses accompanying redistribution are shown to play a pivotal role in determining the behavior of the risk averse median voter the model is illustrated using a one percent demogrant redistribution

the price of options illiquidity the purpose of this paper is to examine the effect of illiquidity on the value of currency options we use a unique dataset that allows us to explore this issue in special circumstances where options are issued by a central bank and are not traded prior to maturity the value of these options is compared to similar options traded on the exchange we find that the nontradable options are priced about 21 percent less than the exchange traded options this gap cannot be arbitraged away due to transactions costs and the risk that the exchange rate will change during the bidding process

marginal conditional stochastic dominance this paper introduces the concept of marginal conditional stochastic dominance mcsd which states the conditions under which all risk averse individuals when presented with a given portfolio prefer to increase the share of one risky asset over that of another mcsd rules also answer the question of whether all risk averse individuals include a new asset in their portfolio when assets returns are correlated mcsd criteria are expressed in terms of the probability distributions of the assets and of the underlying portfolio an empirical application of mcsd is provided using stocks traded on the new york stock exchange mcsd rules are used to show that in the long run one cannot assert that the market portfolio is inefficient

option pricing and implicit volatilities abstract this paper demonstrates that black scholes implied volatilities can be used to value options in many situations where the assumptions of the black scholes model are violated including i alternative stock processes ii stochastic interest rates and iii market frictions given its computational simplicity this procedure provides an attractive alternative to the more complex models with a direct estimation procedure

portfolio analysis with a large universe of assets covariance matrix optimization algorithms are applied to a large number of assets a previous paper by burgess and bey 1988 suggests that attempting to optimize a large number of securities with the traditional covariance matrix model is not practical an alternative approach ranks the securities with the reward to volatility reward to beta ratio and then optimizes a smaller subset of securities with the covariance matrix model this study proposes additional screening methods such as stochastic dominance reward to variability r v ratios reward to lower partial moment r lpm ratios and the optimization of subgroups and provides an empirical test of the various screening methodologies the results indicate that the full covariance critical line optimization algorithm is surprisingly robust compared to the other techniques

variance vs downside risk is there really that much difference abstract the popularity of downside risk among investors is growing and mean return downside risk portfolio selection models seem to oppress the familiar mean variance approach the reason for the success of the former models is that they separate return fluctuations into downside risk and upside potential this is especially relevant for asymmetrical return distributions for which mean variance models punish the upside potential in the same fashion as the downside risk the paper focuses on the differences and similarities between using variance or a downside risk measure both from a theoretical and an empirical point of view we first discuss the theoretical properties of different downside risk measures and the corresponding mean downside risk models against common beliefs we show that from the large family of downside risk measures only a few possess better theoretical properties within a return risk framework than the variance on the empirical side we analyze the differences between some us asset allocation portfolios based on variances and downside risk measures among other things we find that the downside risk approach tends to produce on average slightly higher bond allocations than the mean variance approach furthermore we take a closer look at estimation risk viz the effect of sampling error in expected returns and risk measures on portfolio composition on the basis of simulation analyses we find that there are marked differences in the degree of estimation accuracy which calls for further research

downside risk measures and equity returns in the nyse although investors are concerned foremost with mean and variance they are also sensitive to downside risk in this article we employ several risk variables of traditional and downside risk measures to evaluate the equity returns in the new york stock exchange nyse market in order to test their explaining power the test results show that variance or sd is better than beta in the performance however those traditional risk measures have almost less explanatory power than total downside risk measures whether the downside risk measures are relative to zero the mean return or the market index return when they are used to predict the future risk premium the results also show that the significance of the downside risk measures in the nyse market is different between different industry sectors different periods of time and in different individual equities

the systematic risk of discretely rebalanced option hedges this paper demonstrates that black scholes option pricing model hedge positions that are risk free when rebalanced continuously will frequently exhibit substantial systematic risk when rebalanced at finite intervals this systematic risk may have biased important empir ical tests of the option pricing model moreover this systematic risk means that the blackscholes option pricing model is inherently inconsistent with the discrete time version of the capital asset pricing model capm

hedging derivative securities and incomplete markets an e arbitrage approach given a european derivative security with an arbitrary payoff function and a corresponding set of underlying securities on which the derivative security is based we solve the optimal replication problem find a self financing dynamic portfolio strategy involving only the underlying securities that most closely approximates the payoff function at maturity by applying stochastic dynamic programming to the minimization of a mean squared error loss function under markov state dynamics we derive recursive expressions for the optimal replication strategy that are readily implemented in practice the approximation error or e of the optimal replication strategy is also given recursively and may be used to quantify the degree of market incompleteness to investigate the practical significance of these e arbitrage strategies we consider several numerical examples including path dependent options and options on assets with stochastic volatility and jumps