a risk return measure of hedging effectiveness with the formation of a formal market for the trading of financial futures in october 1975 a renewed interest in the futures contract as an investment vehicle has emerged the traditional approach was to view investing in futures as a way of off setting potential price risk associated with a given spot position while these descriptive scenarios see 3 6 10 12 13 14 and 19 adequately illustrate the traditional hedging strategy their simplifying assumptions introduce a lack of realism into the investment process the implication drawn from many of these articles is that if one is interested in risk reduction one should simply take the opposite position in the appropriate number of futures contracts to totally offset one s existing spot position

the spot and forward exchange rates some empirical evidence of singapore this paper studies the foreign exchange market of singapore it examines the hypotheses that the spot exchange rate follows a random walk and that the exoected value of the future spot rate is the current forward rate using various powerful tests that have been developed recently in the economietric literature we reject the two hypotheses convincingly

evidence on corporate hedging policy this paper provides empirical evidence on the determinants of corporate hedging decisions the paper examines the evidence in light of currently mandated financial reporting require ments and in particular the constraints placed on anticipatory hedging data on hedging are obtained from 1992 annual reports for a sample of 3 022 firms out of the 771 firms classified as hedgers 543 firms disclose information in their annual reports on their hedging activities the remaining 228 firms report use of derivatives but no information on hedging activities based on the evidence i draw the following conclusions with respect to the models of hedging evidence is inconsistent with financial distress cost models evidence is mixed with respect to contracting cost capital market imperfections and tax based models and evidence uniformly supports the hypothesis that hedging activities exhibit economies of scale

a reexamination of purchasing power parity a multicountry and multiperiod study abstract this paper re examines the purchasing power parity ppp theory in a multiple exchange rate world owing to a lack of precision in estimating the parameters many authors concluded that ppp did not hold very well in the 1970s using a time series cross sectional estimation procedure we are unable to reject the hypothesis that ppp holds in several currencies simultaneously in addition the parameters are precisely estimated this result follows from the estimation procedure which allows us to exploit the cross sectional variation in the data and the contemporaneous correlation in the deviations from ppp

why has u s inflation become harder to forecast we examine whether the u s rate of price inflation has become harder to forecast and to the extent that it has what changes in the inflation process have made it so the main finding is that the univariate inflation process is well described by an unobserved component trend cycle model with stochastic volatility or equivalently an integrated moving average process with time varying parameters this model explains a variety of recent univariate inflation forecasting puzzles and begins to explain some multivariate inflation forecasting puzzles as well

the role of farmers behavioral attitudes and heterogeneity in futures contracts usage the relationship between farmers behavioral attitudes and use of futures contracts is examined taking into account non directly observable variables and the heterogeneity of farmers the relationships are tested on a stratified data sample of 440 farmers cluster analysis and covariance structure equation models are used to validate the relationships farmers are found not to be homogenous regarding the factors influencing their use of futures heterogeneity at the segment level masked important effects at the aggregate level notably risk attitude furthermore several psychological constructs for farmers related to market orientation risk exposure market performance and entrepreneurial behavior play important roles in their use of futures contracts

human capital producer education programs and the adoption of forward pricing methods using a sample of 509 kansas producers we evaluate factors affecting adoption of forward pricing methods we focus on producers human capital accumulation and its effect on adoption of forward pricing techniques probit models are employed to evaluate producers participation in educational programs and their forward pricing adoption decisions tobit models are employed to evaluate individual levels of adoption of these techniques in the marketing of wheat corn grain sorghum soybeans and cattle

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

has u s inflation really become harder to forecast recently stock and watson 2007 showed that since the mid 1980s it has been hard for backward looking phillips curve models to improve on simple univariate models in forecasting u s inflation while this indeed is the case when the benchmark is a causal autoregression little change in forecast accuracy is detected when a noncausal autoregression is taken as the benchmark in this note we argue that a noncausal autoregression indeed provides a better characterization of u s inflation dynamics than the conventional causal autoregression and it is therefore the appropriate univariate benchmark model

the collapse of purchasing power parities during the 1970 s one of the striking facts concerning the relationship beiveen prices and exchange rates during the 1970 s has been the dismal performance of the predictions of the simple versions of the purchasing power parity doctrine ppp that doctrine in its absolute version states that the equilibrium exchange rate between domestic and foreign currencies equals the ratio of domestic to foreign price levels the relative version of the doctrine relates equilibrium changes in exchange rates to changes in the ratio of domestic to foreign prices during the 1970 s short run changes in exchange rates bore little relationship to short run differentials in national inflation rates and frequently divergences from purchasing power parities have been cumulative this paper reviews and analyzes the empirical record of exchange rates and prices during the 1970 s and the analysis is based on the experience of the dollar pound the dollar frecch franc and the dollar dm exchange rates section 2 presents the evidence on ppp during the 1970 s and contrasts it with the evidence from the 1920 s a period during which the doctrine held up reasonably well this analysis is relevant for assessing whether the flexible exchange rate system was successful in providing national economies with an added degree of insulation from foreign shocks and whether it provided policymakers with an added instrument for the conduct of macroeconomic policy the evidence regarding devia tions from purchasing power parities is also relevant for determining whether there is a case for managed float section 3 attempts to explain what went wrong with

real exchange rate behavior abstract using random simulations with artificial data with identical sample characteristics to the long sample exchange rate data employed by lothian and taylor lothian j r and taylor m p 1996 the recent float from the perspective of the past two centuries journal of political economy 104 488 509 we show that standard unit root tests have extremely low power over sample sizes corresponding to the recent float the probability of rejecting the null hypothesis when it is false is extremely low with 20 years or even 50 years of data and only reaches an acceptable level over much longer spans

how are derivatives used evidence from the mutual fund industry we investigate investment managers use of derivatives by comparing return distributions for equity mutual funds that use and do not use derivatives in contrast to public perception derivative users have risk exposure and return performance that are similar to nonusers we also analyze changes in fund risk in response to prior fund performance changes in risk are substantially less severe for funds using derivatives consistent with the explanation that managers use derivatives to reduce the impact of performance on risk we provide new evidence regarding the implications of cash flows and managerial gaming for the relation between performance and risk

the foreign exchange market in a highly open developing economy the case of singapore abstract the purpose of this paper is to examine the foreign exchange market of singapore from the perspective of market efficiency and further to determine if factors such as the unanticipated changes in interest rate differentials and purchasing power parity play a role in the behavior of the exchange rate using a variety of tests it is shown that the singapore market despite its relatively small size displays many of the same characteristics observed in the markets of developed countries this is taken as a confirmation of the general nature of the empirical regularities found in studies of such markets

a note on the determinants of unexpected exchange rate movements abstract in this paper we study the relative importance of surprises in fundamentals in explaining unexpected exchange rate movements employing a unique survey dataset that contains matched exchange rate and interest rate expectations we are able to derive a number of interesting conclusions a variance decomposition of unexpected exchange rate movements into various components reveals that interest rate news is relatively unimportant but that changes in perceptions about risk premia and more importantly revisions of expectations with regard to future exchange rate levels are crucial in explaining unexpected exchange rate movements

the j curve effect and us agricultural and industrial trade this paper examines the j curve hypothesis for us agricultural and manufactured goods using the shiller lag model the results support the j curve effect for agricultural goods but not for manufactured goods these findings explain why many studies in the literature fail to support the j curve phenomenon there are two explanations for these findings 1 the aggregation bias of data that combine both agricultural and manufactured goods and 2 the country under study is often an industrial nation like the us or japan with a high proportion of manufactured goods in both exports and imports

risk perceptions risk preference and acceptance of risky food consumers risk preferences are often overlooked in studies of consumer demand for risky food we find that risk preferences elicited through context less lottery choices are significantly related to consumers stated preferences for genetically modified gm food these results suggest risk preferences elicited in the laboratory are not artificial in the sense that they appear to be related to the same risk preferences that govern other individual decisions such as food choice consistent with theoretical expectations risk perceptions and risk preferences were found to be significant determinants of acceptance of gm food which has important implications for explaining consumer behavior

syndicated euro credit sovereign risk assessments market efficiency and contagion effects this study investigates the informational efficiency of the syndicated euro credit market by analyzing the adjustment of spreads to news characterizing the state of sovereign borrowers creditworthiness in addition the potential for an interlinked crisis contagion effects between three major borrowing countries is examined that is contagion tests are conducted to see how news for one borrower affects the spreads charged to the others the evidence suggests that the euro credit pricing process has been informationally efficient however with respect to the contagion effects it was found that noncountry specific risk factors systematically influence country specific spreads

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

futures contracts in water leasing an experimental analysis using basin characteristics of the rio grande nm providing for increased water demands during periods of persistent drought and climatic variability may require water managers users and planners to think differently about how water resources are allocated a water marketing institution that allows water rights holders to reallocate water on a temporary basis could overcome these challenges with minimal conflict in this paper a water marketing institution that allows for the temporary reallocation of water rights in a spot and futures market is investigated the results provide insight into three key questions 1 how does trading impact the physical system 2 does the value of water differ by trading agents 3 how is economic welfare redistributed as a result of trading results of experimental treatments display minor impacts to the physical system that prices differ across the different type of trading agents and the addition of a futures market has the ability to decrease market prices while increasing economic welfare as a futures market allows users to hedge against future water uncertainty

the ecu as international money abstract the ecu is compared with alternative foreign currencies to determine how adequately it performs the various functions of international money for the period april 1979 through december 1984 it is found that for most european economic agents the ecu was superior to the sdr the us dollar and a representative foreign currency the netherlands guilder as a unit of account as a store of value and as a means of deferred payment an examination is made of the distribution of the series of exchange rate changes so that appropriate statistical methods are employed in making a final assessment about the variability of the ecu

measuring producers risk preferences a global risk attitude construct in applied agricultural economic research various risk attitude elicitation techniques are used here we investigate whether risk attitude measures rooted in the expected utility framework are related to measures rooted in the multi item scale framework using a second order factor analytical model and data obtained from personal computer guided interviews with 373 farmers we investigate whether the common variance among the latent risk attitude measures can be accounted for by a global risk attitude construct we find that the different risk attitude measures are related and that the global risk attitude construct is significantly related to farmers intention to use futures contracts our research suggests that farmers risk attitude is a higher order characteristic that cannot be effectively extracted by a single measure in empiricalstudies deal ing with risk risk attitudes and producers market behavior various risk attitude measures are used two major approaches to quantify directly farmers risk attitudes can be distinguished measures derived from the expected utility framework and measures derived from responses to multi item scales e g antle chavas and holt goodwin and schroeder saha shumway and talpaz smidts the purpose of this research is to test whether risk attitude measures rooted in the expected utility framework are related to the risk attitude scales rooted in the multiitem scale approach and if so whether these risk attitude measures share a common

tax incentives to hedge for corporations facing tax function convexity hedging lowers expected tax liabilities thereby providing an incentive to hedge we use simulation methods to investigate convexity induced by tax code provisions on average the tax function is convex although in approximately 25 percent of cases it is concave carrybacks and carryforwards increase the range of income with incentives to hedge other tax code provisions have minor impacts among firms facing convex tax functions average tax savings from a five percent reduction in the volatility of taxable income are about 5 4 percent of expected tax liabilities in extreme cases these savings exceed 40 percent if a firm faces a convex tax function then hedging that reduces the volatility of taxable income reduces the firm s expected tax liability for a firm facing some form of tax progressivity when taxable income is low its effective marginal tax rate will be low but when income is high its tax rate will be high if such a firm hedges the tax increase in circumstances where income would have been low is smaller than the tax reduction in circumstances where income would have been high thus lowering expected taxes in examining the importance of various motives to hedge researchers have employed two general methods survey and regression analysis there are potential problems with each for example some managers might view the information requested in a survey as proprietary or might hesitate to admit that they employ derivatives to speculate rather than hedge to employ regression methods researchers must generate proxies for tax status in addition to other firm characteristics to the extent that a tax variable e g whether the firm has a net operating loss carryforward proxies for factors such as financial distress as well as tax circumstances analysts face an identification problem in interpreting the results

does heterogeneity in goals and preferences affect efficiency a case study of farm households in northern nigeria household characteristics are commonly used to explain variation in smallholder efficiency levels the underlying assumption is that differences in intended behavior are well described by such variables while there is no a priori reason that this is the case moreover heterogeneity in farmer goals and preferences in relation to the role of the farm enterprise are not well documented in developing countries this article makes a contribution to fill this gap by empirically determining heterogeneity in farmer goals and attitudes in nigeria through a pair wise ranking supplemented with likert scales factor analysis is used to reduce these data into behavioral factors we estimate technical and allocative efficiency levels and analyze how these are related to farm characteristics and the identified behavioral factors the models in which both intended behavior and farmer characteristics are included give a significantly better fit over models in which only household characteristics are included these regression results suggest that the socioeconomic environment affects efficiency levels both directly and indirectly through changes in goals and attitudes

relating environmental attitudes and contingent values how robust are methods for identifying preference heterogeneity we assess the importance and robustness of cluster analysis and latent class analysis as methods to account for unobserved heterogeneity we provide a critique and comparison of both methods in the context of measuring environmental attitudes and a contingent valuation study involving endangered species we find strong evidence of robustness for these methods group characterization and assignment of individuals to groups are similar between methods and willingness to pay estimates are consistent in addition there are significant differences in willingness to pay across environmental attitudinal groups and we find that accounting for unobservable heterogeneity provides a significantly better fitting model

understanding the empirical literature on purchasing power parity the post bretton woods era abstract this paper argues that the empirical failure of statistical tests of ppp in post bretton woods data is largely due to the low power of the tests employed this result is demonstrated using monte carlo experiments on the size and power of different testing procedures a new procedure based on horvath and watson econometric theory 11 pp 984 1014 1995 has greater power than previous approaches using the horvath watson procedure we find moderate evidence in favor of ppp in the post bretton woods era

a new time varying parameter autoregressive model for u s inflation expectations we study the evolution of u s inflation by means of a new noncausal autoregressive model with time varying parameters that outperforms the corresponding causal and constant parameter noncausal models in terms of fit and forecast accuracy our model also beats the unobserved component stochastic volatility ucsv model one of the best performing univariate inflation forecasting models in terms of both point and density forecasts we also show how the new keynesian phillips curve can be estimated based on our noncausal model both expected and lagged inflation turn out important but the former dominates in determining the current inflation

on the determinants of corporate hedging finance theory indicates that hedging increases firm value by reducing expected taxes expected costs of financial distress or other agency costs this paper provides evidence on these hypotheses using survey data on firm s use of forwards futures swaps and options combined with computstat data on firm characteristics of 169 firms in the sample 104 firms use hedging instruments in 1986 the data suggest that firms which hedge face more convex tax functions have less coverage of fixed claims are larger have more growth options in their investment opportunity set and employ fewer hedging substitutes