energy quality and energy surplus in the extraction of fossil fuels in the u s abstract the goal of net energy analysis is to assess the amount of useful energy delivered by an energy system net of the energy costs of delivery the standard technique of aggregating energy inputs and outputs by their thermal equivalents diminishes the ability of energy analysis to achieve that goal because different types of energy have different abilities to do work per heat equivalent this paper describes physical and economic methods of calculating energy quality and incorporates economic estimates of quality in the analysis of the energy return on investment eroi for the extraction of coal and petroleum resources in the u s from 1954 to 1987 eroi is the ratio of energy delivered to energy used in the delivery process the quality adjusted eroi is used to answer the following questions 1 are coal and petroleum resources becoming more scarce in the u s 2 is society s capability of doing useful economic work changing and 3 is society s allocation of energy between the extraction of coal and petroleum optimal the results indicate that petroleum and coal became more scarce in the 1970s although the degree of scarcity depends on the type of quality factor used the quality adjusted eroi shed light on the coal petroleum paradox when energy inputs and outputs are measured in thermal equivalents coal extraction has a much larger eroi than petroleum the adjustment for energy quality reduces substantially the difference between the two fuels the results also suggest that when corrections are made for energy quality society s allocation of energy between coal and petroleum extraction meets the efficiency criteria described by neoclassical and biophysical economists

robust stochastic discount factors when the market is incomplete a new non redundant derivative security cannot be priced by no arbitrage arguments alone moreover there will be a multiplicity of stochastic discount factors and each of them may give a different price for the new derivative security this paper develops an approach to the selection of a stochastic discount factor for pricing a new derivative security the approach is based on the idea that the price of a derivative security should not vary too much when the payoff of the primitive security is slightly perturbed i e the price of the derivative should be robust to model misspecification the paper develops two metrics of robustness the first is based on robustness in expectation the second is based on robustness in probability and draws on tools from the theory of large deviations we show that in a stochastic volatility model the two metrics yield analytically tractable bounds for the derivative price as the underlying stochastic volatility model is perturbed the bounds can be readily used for numerical examination of the sensitivity of the price of the derivative to model misspecification

general equilibrium pricing of cpi derivatives we examine the issue of pricing forward futures and option contracts written on the consumer price index cpi the change of which is a measure of inflation affecting the economy traditional approaches postulate an exogenous process for the price level and then derive cpi derivatives prices by standard arbitrage arguments by contrast we build the general equilibrium of a continuous time monetary economy that is affected by both real and nominal shocks the price level and thus the inflation rate are found endogenously and solutions for the prices of cpi derivatives are obtained which are in closed form in a specialized version of the economy

is the entropy law relevant to the economics of natural resource scarcity abstract nicholas georgescu roegen and herman daly have argued that the entropy law imposes an absolute resource scarcity which cannot be overcome with technological change exploration or substitution on the contrary this paper argues that their critique is fundamentally flawed the pessimistic scenario requires a concept of materials entropy which is highly problematic materials entropy cannot be defined independently of technology and it is impossible to aggregate over different types of materials to meaningfully talk about available versus unavailable matter in the aggregate failing a concept of materials entropy the critique fails since the earth is not closed with respect to energy

classical thermodynamics and economic general equilibrium theory abstract a long history of analogy making between neoclassical economics and physical thermodynamics has unfortunately served to obscure two important relations between the two fields their definitions of equilibria stem from essentially the same three axioms for the mathematical representations of systems while the classes of transformation each has chosen to emphasize and their responses to the problem of path dependence have led them to very different interpretations of duality in those representations despite these conventional differences we show that economies in which all agents have preferences quasi linear in some good have a trading constraint structure isomorphic to the structure of physical systems with classical thermodynamic equations of state exact equivalents of thermodynamic potentials including entropy can be constructed and function as the economic counterparts to free energies quasi linear economies are the most general in which the walrasian idea of price formation as an analog of force balance can be realized more general economic models raise the same methodological problems as more complex physical models that exhibit path dependence we show how the degree of aggregatability of an economic model corresponds to which properties of equilibria retain path independence and to the extent to which a social welfare function exists a new contour money metric utility defines the maximal generalization of social welfare functions in arbitrary economies but depends on the endowments and composition of the economy in non quasi linear cases and is limited to one dimensional contours of equilibria in non aggregatable cases the differences between economic and thermodynamic methodology lies in the economic focus on the irreversible movement from initial disequilibrium endowments to equilibrium through voluntary trade in contrast to the thermodynamic recognition that only reversible transformations lead to measurement of system structure the consequences of respecting reversibility for economic method are sketched and alternative interpretations of the walrasian notion of wealth preservation are presented

energy as a factor of production and entropy as a pollution indicator in macroeconomic modelling abstract fluctuating energy prices and the environment s limited capacity for absorbing pollution constitute significant uncertainties for future industrial evolution solving a set of differential equations and using the simplex algorithm in linear programming we look into the questions how changing energy inputs and prices have affected industrial growth in the past and how the energy system can be optimized so that pollution becomes minimum in the future we obtain production functions which depend linearly on energy and exponentially on the ratios of labor capital and energy capital they describe well the growth of output in west germany and the u s a during the last two decades and the responses to theenergy price explosions energy conservation was an important response element the most optimistic possible savings of primary energy by heat exchangers heat pumps and cogeneration at the present fixed energy demand profiles are computed to be 54 in the netherlands 36 in west germany and 59 in japan a pollution indicator entropy production is proposed and incorporated in a model of enviromental constraints on industrial growth

evaluating natural resource investments notwithstanding impressive advances in the theory of finance over the past 2 decades practical procedures for capital budgeting have evolved only slowly the standard technique which has remained unchanged in essentials since it was originally proposed see dean 1951 bierman and smidt 1960 derives from a simple adaptation of the fisher 1907 model of valuation under certainty under this technique expected cash flows from an investment project are discounted at a rate deemed appropriate to their risk and the resulting present value is compared with the cost of the project this standard textbook technique reflects modern theoretical developments only insofar as estimates of the discount rate may be obtained from crude application of single period asset pricing theory but see brennan 1973 bogue and roll 1974 turnbull 1977 constantinides 1978 the inadequacy of this approach to capital budgeting is widely acknowledged although not widely discussed its obvious deficiency is its the evaluation of mining and other natural resource projects is made particularly difficult by the high degree of uncertainty attaching to output prices it is shown that the techniques of continuous time arbitrage and stochastic control theory may be used not only to value such projects but also to determine the optimal policies for developing managing and abandoning them the approach may be adapted to a wide variety of contexts outside the natural resource sector where uncertainty about future project revenues is a paramount concern

super efficiency evaluations based on potential slack abstract super efficiency evaluations are introduced along the lines of the potential improvements approach in journal of productivity analysis 12 1999 233 both a reference selection and a related super efficiency index are defined the new potential slack super efficiency index is compared to a farrell based super efficiency index as in management science 39 1993 1261 with respect to convex envelopment technologies

entropy limits to growth and the prospects for weak sustainability in this paper we analyze the consequences of mass and energy conservation and the second law of thermodynamics for economic activity in contrast to former studies we deduce our results formally from a general model of production and consumption we show that in a static setting for economies containing irreversible processes a non zero resource input as well as non zero emissions are necessary to sustain a positive level of consumption we generalize this result to a dynamic setting and apply it to the growth discussion and the sustainability discourse thereby we show that limits to growth of production and consumption are likely to exist and that the concept of weak sustainability is either morally unattractive or physically infeasible d 2005 elsevier b v all rights reserved

dynamic control of a monopolist s product and process innovation with reference quality our main purpose is to investigate the dynamic control problem of a monopolist s product and process innovation under reference quality the main features of this article are i a monopolist deal

thermodynamic constraints on optimal depletion of copper and aluminum in the united states a dynamic model of substitution and technical change abstract the paper proposes a methodology to integrate concepts from thermodynamics into economic models of optimal natural resource use and to empirically determine relationships between changes in thermodynamic states of materials and the use of high quality energy sources the integration is aimed at an assessment of technologies substitution and technical change based on economic concepts that do justice to fundamental physical constraints a model of natural resource use and production has been developed that combines econometric time series analysis with dynamic modeling techniques the model explicitly includes thermodynamic constraints on i the process of separating minerals from crude ore ii smelting processes iii substitution among inputs and iv endogenous technical change in mining smelting and refining based on empirical information the model has been simulated to assess outer limits of feasible resource savings in copper and bauxite mining smelting and refining in the united states conclusions are drawn for the evaluation of products and effluents from mining smelting and refining operations with regard to changes in the physical resource base and environmental quality

on arbitrage free pricing of interest rate contingent claims unlike most interest rate claim models the ho lee model utilizes full information on the current term structure unfortunately the model has a major deficiency in that negative interest rates can occur this article modifies the model such that interest rates are well behaved

theoretical relations between risk premiums and conditional variances many statistical models of time varying risk premiums including the autoregressive conditional heteroscedasticity arch in mean attempt to exploit a relation between risk premiums and conditional variances or covariances of asset returns we examine this relation in numerical versions of a dynamic asset pricing theory and show that it can be increasing decreasing flat or nonmonotonic its shape depends on both the preferences of the representative agent and the stochastic structure of the economy without additional structure the theory does not provide either a general foundation for arch in mean specifications or a simple interpretation of their parameters

product and process innovation the implication of making comparisons between uniform pricing monopolist and second degree price discriminating monopolist the question of simultaneous product and process innovation price discrimination is crucial for technologically evolving industries in this paper we assume that there are two different kinds of

a dynamic programming approach for pricing options embedded in bonds abstract we propose a dynamic programming dp approach for pricing options embedded in bonds the focus being on call and put options with advance notice an efficient procedure is developed for the cases where the interest rate process follows the vasicek cox ingersoll ross cir or generalized vasicek models our dp methodology uses the exact joint distribution of the interest rate and integrated interest rate at a future date conditional on the current value of the interest rate we provide numerical illustrations for the vasicek and cir models comparing our dp method with finite difference methods our procedure compares quite favorably in terms of both efficiency and accuracy an important advantage of the our dp approach is that it can be applied to more general models calibrated to capture the term structure of interest rates e g the generalized vasicek model

valuing managerial flexibility an application of real option theory to mining investments abstract the value of managerial flexibility is assessed using data on prices costs grades reserves ore extraction and metal output for a panel of canadian copper mines a real option model is estimated and solved for project and option values most empirical researchers i consider the initial investment decision but neglect flexible operation thereafter ii assume that price is stochastic but ignore cost and reserve uncertainty and iii model price as a nonstationary stochastic process the evolution of three state variables price cost and reserves is assessed here differences in assumptions compared to others are found to lead to large differences in estimated project and option values

dynamic multi directional inefficiency analysis of european dairy manufacturing firms abstract this paper extends the method of multi directional inefficiency analysis to account for dynamics of firms production decisions the resulting approach dynamic multi directional inefficiency analysis measures variable input and investment specific inefficiency using data envelopment analysis the empirical application focuses on panel data of large dairy manufacturing firms over the period 2005 2012 in three european regions eastern southern and western the results show that investments are the most inefficient factor for firms in all european regions followed by labour and materials however the findings also suggest a high dispersion of investment specific inefficiency scores within the sample the paper also finds that the median dynamic inefficiency is changing rapidly in the years after the beginning of the financial crisis

the pension costs from a defined benefit to individual pension accounts do they cost more in the case of taiwan this article develops a market based liability valuation model to price individual pension costs of a defined benefit db pension plan the purpose is to compare them with the new labour pension plan individual pension accounts ipas in the case of taiwan the results based on the numerical approach show that the new ipas cost a company more than the old db plan except if the average wage growth relative to the risk free interest rate is high enough

efficiency and risk in taiwan banking sbm super dea estimation in this study we adopt the two data envelopment analysis dea methods including banker charnes cooper bcc and slacks based measure sbm super efficiency to investigate whether a bank s technical efficiency index s results incorporating account risk and not incorporating account risk differ significantly the information is obtained from 43 taiwanese banks for the period 1998 to 2002 we also employ the nonradial and slacks based malmquist total factor productivity tfp index to measure the impact of productivity change on the panel data our empirical results from the dea approach are summarized as follows 1 loan quality factors have an impact on a bank s efficiency in general the bank with a higher degree of problem loans drops down its efficiency by incorporating account risk however the bank with a lower degree of problem loans increases its efficiency by incorporating account risk 2 super efficiency provides a good framework for ranking efficient units 3 based on the nonradial an

the effect of transaction size on off the run treasury prices this paper examines intra day trading data from the inter dealer broker market for u s treasury securities and measures the degree of price pressure in the off the run treasury market as is well known securities that would appear to be very close substitutes i e on the run and off the run treasury bonds behave as if there is some degree of market segmentation this is the first systematic study of the off the run treasury note and bond market focused entirely on a price pressure effect using intra day data the paper analyzes price pressure through matched pairs of securities that differ only in liquidity

the valuation of multiple claim insurance contracts this paper provides a closed form solution for the value of a multiple claim insurance contract that is subject to a deductible amount and or an upper limit on claims the solution is a time integral of european option prices the model provides three important insights first systematic risk in insurance policies is altered in the presence of deductibles and maximum indemnity levels second idiosyncratic risk affects policy valuation and the required rates of return on underwriting portfolios finally contrary to traditional actuarial intuition changes in the risk free interest rate may either increase or reduce policy values

exact solutions for futures and european futures options on pure discount bonds this paper provides closed form solutions for futures and european futures options on pure discount bonds under the ornstein uhlenbeck normal process a significant difference between black s model 1976 and the model in this paper for futures options is discussed

a nonlinear general equilibrium model of the term structure of interest rates abstract we derive and test an alternative closed form general equilibrium model of the term structure within the cox ingersoll and ross theoretical framework in which yields are nonlinear functions of the risk free rate we show that equilibrium bond prices and the risk free rate are not always inversely related and that bond risk need not be strictly increasing in maturity using hansen s generalized method of moments to obtain parameter estimates this nonlinear model outperforms the cox ingersoll and ross square root model in describing actual treasury bill yields for the 1964 1986 period

the extraction of natural resources the role of thermodynamic efficiency abstract the modelling of production in microeconomics has been the subject of heated debate the controversial issues include the substitutability between production inputs the role of time and the economic consequences of irreversibility in the production process a case in point is the use of cobb douglas type production functions which completely ignore the physical process underlying the production of a good we examine these issues in the context of the production of a basic commodity such as copper or aluminium we model the extraction and the refinement of a valuable substance which is mixed with waste material in a way which is fully consistent with the physical constraints of the process the resulting analytical description of production unambiguously reveals that perfect substitutability between production inputs fails if a corrected thermodynamic approach is used we analyze the equilibrium pricing of a commodity extracted in an irreversible way we force consumers to purchase goods using energy as the means of payment and force the firm to account in terms of energy the resulting market provides the firm with a form of reversibility of its use of energy under an energy numeraire energy resources will naturally be used in a more parsimonious way

energy money and pollution abstract this paper explores general equilibrium consumption choices and interest rate determination in a deterministic two period model in which the production side explicitly describes the thermodynamic process unavoidably connected with production as argued by georgescu roegen a simple energy based production process is modeled which is not in a stationary state the resulting production function is time dependent in neoclassical general equilibrium the thermodynamic implication of the production process i e the production of waste will not be taken into account by decision making agents for welfare optimality the resulting externality needs to be corrected by a social planner or through the use of environmental related taxation however it is shown that imposing energy as a medium of exchange money in the same economy makes agents energy conscious and decreases the externality associated with entropic waste through a market mechanism without the need for intervention in the limit case in which production occurs in thermodynamic equilibrium no entropic waste is produced and the model collapses to the nested neoclassical model a contribution of the proposed approach is the determination of energy money prices in general equilibrium despite the fact that energy does not enter the agents utility function and therefore has no direct value money prices and interest rate can be fully characterized in the model due precisely to the production technology adopted in this competitive equilibrium the market interest rate will be greater than the real interest rate the change in the numeraire and medium of exchange used affects the economy due to the non stationarity of the production process but has no effect in the limit case in which the productive process reaches a steady state

an intertemporal general equilibrium model of asset prices this paper develops a continuous time general equilibrium model of a simple but complete economy and uses it to examine the behavior of asset prices in this model asset prices and their stochastic properties are determined endogenously one principal result is a partial differential equation which asset prices must satisfy the solution of this equation gives the equilibrium price of any asset in terms of the underlying real variables in the economy in this paper we develop a general equilibrium asset pricing model for use in applied research an important feature of the model is its integration of real and financial markets among other things the model endogenously determines the stochastic process followed by the equilibrium price of any financial asset and shows how this process depends on the underlying real variables the model is fully consistent with rational expectations and maximizing behavior on the part of all agents our framework is general enough to include many of the fundamental forces affecting asset markets yet it is tractable enough to be specialized easily to produce specific testable results furthermore the model can be extended in a number of straightforward ways consequently it is well suited to a wide variety of applications for example in a companion paper cox ingersoll and ross 7 we use the model to develop a theory of the term structure of interest rates many studies have been concerned with various aspects of asset pricing under uncertainty the most relevant to our work are the important papers on intertemporal asset pricing by merton 19 and lucas 16 working in a continuous time framework merton derives a relationship among the equilibrium expected rates of return on assets he shows that when investment opportunities are changing randomly over time this relationship will include effects which have no analogue in a static one period model lucas considers an economy with homogeneous individuals and a single consumption good which is produced by a number of processes the random output of these processes is exogenously determined and perishable assets are defined as claims to all or a part of the output of a process and the equilibrium determines the asset prices our theory draws on some elements of both of these papers like merton we formulate our model in continuous time and make full use of the analytical tractability that this affords the economic structure of our model is somewhat similar to that of lucas however we include both endogenous production and

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

a continuous time equilibrium model of forward prices and futures prices in a multigood economy abstract this paper is a theoretical investigation of equilibrium forward and futures prices we construct a rational expectations model in continuous time of a multigood identical consumer economy with constant stochastic returns to scale production using this model we find three main results first we find formulas for equilibrium forward futures discount bond commodity bond and commodity option prices second we show that a futures price is actually a forward price for the delivery of a random number of units of a good the random number is the return earned from continuous reinvestment in instantaneously riskless bonds until maturity of the futures contract third we find and interpret conditions under which normal backwardation or contango is found in forward or futures prices these conditions reflect the usefulness of forward and futures contracts as consumption hedges

on real interest rate dynamics and regime switching abstract we find evidence of regime switching dynamics in the usa and the uk real interest rates over the period 1881 2003 for the uk there is a regime in which the real interest rate displays a relatively stronger mean reversion and a regime in which it displays a relatively weaker mean reversion the former regime is characterized by a relatively larger error in the estimation of the reversion parameter and higher volatility for the usa the two regimes differ in volatility the probability of transition from one regime to another is found to be significantly related to the inflation rate regime and to the political regime the results highlight the importance of regime switching in the dynamics of the real interest rate as well as the role of inflation and political regimes in explaining this switching

the term structure of interest rates with housing abstract this paper develops a general equilibrium model to study the link between the amount of capital invested in housing assets and the term structure of interest rates in the model the production of housing assets is irreversible and housing assets can be used as collateral for borrowing funds agents decisions about consumption and investments in housing and non housing assets generate a time varying market price of risk that drives the dynamics of the term structure the calibration to u s data using the simulated method of moments technique captures the dynamics of consumption and the short and long term interest rates

an equilibrium model of exchange rate determination and asset pricing with nontraded goods and imperfect information this paper presents a two country model with maximizing households stochastic production stochastic money growth and perfect capital mobility because of the presence of nontraded goods households in different countries consume different goods analytic solutions are presented for the nominal exchange rate the real exchange rate nominal interest rates and real interest rates it is shown that the model is compatible with some important features of the real world behavior of exchange rates when households are imperfectly informed about the distribution of money growth the exchange rate exhibits patterns of overshooting and is more volatile than the ratio of the money stocks copyright 1987 by university of chicago press

the risk premium of volatility implicit in currency options this article provides an empirical investigation of the risk neutral variance process and the market price of variance risk implied in the foreign currency options market there are three principal contributions first the parameters of heston s mean reverting square root stochastic volatility model are estimated using dollar mark option prices from 1987 to 1992 second it is shown that these implied parameters can be combined with historical moments of the dollar mark exchange rate to deduce an estimate of the market price of variance risk these estimates are found to be nonzero time varying and of sufficient magnitude to imply that the compensation for variance risk is a significant component of the risk premia in the currency market finally the out of sample test suggests that the historical variance and the hull and white implied variance contain no more information than that imbedded in the heston implied variance

securities markets diffusion state processes and arbitrage free shadow prices this paper develops the parametric restrictions imposed on diffusion state processes by the requirement of arbitrage free asset pricing using the equivalent martingale measure as a starting point the diffusion property is exploited to specify the shadow pricing func tion which takes conditional state variable probabilities under the reference measure into arbitrage free contingent claim prices the main results of the paper provide differential equations associated with the shadow price function that are used to identify restrictions on the parameters of assumed diffusion processes the paper concludes with an application to the cir model where the state variable the instantaneous interest rate is assumed to follow a square root process calculations are also provided for the parametric restrictions imposed on the brownian bridge and ou state variable processes

evaluating environmental investments a real options approach the paper presents a model that determines when at which output price level it is optimum for a firm to invest in environmental technologies and which are the main parameters that affect this decision our analysis shows that firms require high output price levels to be induced to invest in environmental technologies because they optimally would not want to commit to a heavy irreversible investment that could turn out to be unprofitable in the event of a price fall a comparative static analysis predicts that firms in industries with high output price volatility would be more reluctant to invest in environmental protection technologies and would be more willing to operate at low output levels thus attaining low emission levels increases in the interest rate would also reduce optimal environmental investment levels

time horizon and the discount rate abstract we consider an economy a la lucas 1978 econometrica46 1429 1446 with a risk averse representative agent the exogenous growth rate of the economy follows a random walk we characterize the set of utility functions for which it is efficient to discount more distant cash flows at a lower rate the benchmark result is that when the growth rate is almost surely nonnegative the yield curve is decreasing if and only if relative risk aversion is decreasing with wealth relaxing the assumption on the absence of recession requires more restrictions on preferences such as increasing relative prudence journal of economic literature classification numbers d81 d91 q25 q28

equilibrium valuation of foreign exchange claims this article studies the equilibrium valuation of foreign exchange contingent claims within a continuous time lucas 1982 two country model exchange rates interest rates and in particular factor risk prices are all endogenously and jointly determined this guarantees the internal consistency of these price processes with a general equilibrium in the same model closed form valuation formulas are presented for currency options and currency futures options common to these formulas is that stochastic volatility and stochastic interest rates are admitted hedge ratios and other comparative statics are also provided analytically it is shown that most existing currency option models are included as special cases this article studies the equilibrium valuation and hedging of foreign exchange contingent claims the framework for analysis is the continuous time counterpart of the well known two country monetary model of lucas 1982 1 that is we use the modeling structure of lucas 1982 and adopt his representativeagent perfect pooling equilibrium notion rather than extending the lucas setup to a cox ingersoll and ross 1985a henceforth cir production economy as is done in nielsen and saa requejo 1993 for our purpose the lucas framework offers the desired simplicity and tractability we assume a stochastic structure for the international economy such that the resulting nominal interest rates and exchange rate dynamics exhibit similar empirically plausible features as the corresponding ones in nielsen and saa requejo 1993 for example the endogenous interest rates are positively correlated across national borders campbell and clarida 1987 and ilmanen 1995 as a predictor of future spot exchange rates the equilibrium forward exchange rate is biased in a direction consistent with the forward premium puzzle

a simple nonnegative process for equilibrium models abstract this paper presents a general specification for dynamic equilibrium models where nonnegative variables follow the autoregressive gamma process in jasiak and gourieroux 2006 the model solution implies linear dynamics for endogenous variables and provides conditional and unconditional moments in closed form finding the solution is computationally inexpensive requiring only to solve linear and quadratic equations the specification can be applied to a wide variety of models in finance and economics two applications are presented first a time varying volatility premium in a long run risks asset pricing model second time varying volatility in policy shocks in a simple new keynesian model accuracy in these models solutions is high and not significantly affected by time varying volatility

pricing weather derivatives this article presents a general method for pricing weather derivatives specification tests find that a temperature series for fresno ca follows a mean reverting brownian motion process with discrete jumps and autoregressive conditional heteroscedastic errors based on this process we define an equilibrium pricing model for cooling degree day weather options comparing option prices estimated with three methods a traditional burn rate approach a black scholes merton approximation and an equilibrium monte carlo simulation reveals significant differences equilibrium prices are preferred on theoretical grounds so are used to demonstrate the usefulness of weather derivatives as risk management tools for california specialty crop growers

accounting for forward rates in markets for foreign currency absteract forward and spot exchange rates between major currencies imply large standard deviations of both predictable returns from currency speculation and of the equilibrium price measure the intertemporal marginal rate of substitution representative agent theory with time additive preferences cannot account for either of these properties we show that the theory does considerably better along these dimensions when the representative agent s preferences exhibit habit persistence but that the theory fails to reproduce some of the other properties of the data in particular the strong autocorrelation of forward premiums since the advent of flexible exchange rates in the early 1970s a large body of statistical work has established that forward rates for major currencies are not optimal predictors of future spot rates relevant evidence is reported in studies by baillie lippens and mcmahon 1983 bekaert 1991 bilson 1981 boothe and longworth 1984 cumby 1988 cumby and obstfeld 1984 fama 1984 gregory and mccurdy 1984 hansen and hodrick 1983 hodrick and srivastava 1984 and korajczyk and viallet 1990 a more complete list of references is provided by hodrick 1987 these papers indicate that returns from speculation in forward and spot currency markets are predictable and that the predictable components vary considerably over time a number of alternative explanations have been offered for the predictable variation in foreign currency market excess returns kaminsky 1988 korajczyk 1985 and krasker 1980 suggest that infrequent extreme events may make returns appear predictable in small samples the so called peso problem lewis 1989 argues that rational learning following infrequent changes in the process governing equilibrium prices can explain part of the ex post predictability of currency returns froot and frankel 1989 and froot and thaler 1990 examine the hypothesis that market forecasts of future spot

an ecological monetary theory abstract while money is critical to the modern world ecological economics does not have a theory of money that is applicable to its theoretical framework and policy prescriptions accordingly the field often defers to an orthodox conception of money that is historically inaccurate and ontologically inconsistent the dualized nature of western philosophy informs orthodoxy by defining money according its function as a medium of exchange this conceptualization creates logical and historical problems that can be addressed by exploring an interdisciplinary literature that defines money according to its nature as a social relation expressed in a unit of account this paper develops an ecological monetary theory that is simultaneously rooted in a socio historical understanding of money s nature and in an ontology of social and ecological embeddedness such a theory provides ecological economists and others concerned with social and ecological equity with a framework from which to address monetary systems and policy

production consumption and general equilibrium with physical constraints abstract this paper analyzes the consequences of integrating the conservation laws of mass and energy into the microeconomic models of production consumption and general equilibrium we show that abstract models and especially general equilibrium theory are consistent with these physical constraints but most applied and environmental economic models are not we analyze the consequences of physical conservation laws for substitution possibilities and show that these constraints limit the number of independent substitution processes but not the value of the substitution elasticities finally we propose a method for integrating physical constraints into static microeconomic models with a minimum of changes

techno economic evaluation of small hydro power plants in greece a complete sensitivity analysis abstract hydropower has by far been the most mature renewable energy resource used for electricity generation in our planet recently the investors interest was whipped up by the mass development of small hydropower shp stations as they are the most prosperous for additional hydropower penetration in developed electricity markets in greece the increasing interest for building shp stations got off the ground since 1994 ever since an enormous number of requests keep piling up in the greek regulatory authority of energy and the ministry of development with the object of creating new shp stations of total capacity over 600 mw the present work is concentrated on the systematic investigation of the techno economic viability of shp stations the study is concluded by a sensitivity analysis properly adapted for the local market financial situation in order to enlighten the decision makers on the expected profitability of the capital to be invested according to the results obtained the predicted internal rate of return irr values are greater than 18 for most shp cases analysed finally as per the sensitivity analysis carried out the installation capacity factor the local market electricity price annual escalation rate and the reduced first installation cost are found to be the parameters that mostly affect the viability of similar ventures

nominal contracts in a bimetallic standard as its central feature a bimetallic standard grants nominal debtors an option to deliver either of two metals with results from the option pricing literature construction of a formula to evaluate the bimetallic option in debt instruments is straightforward with this formula one can compute the option value in a wide range of nineteenth century u s treasury securities posession of the option values permits an adjustment of the yields on u s securities to make them comparable to yields on nonmetallic european securities evaluating the option allows the estimation of transfers from debtors to creditors copyright 1986 by american economic association

a dynamic analysis of investment in process and product innovation with learning by doing this paper investigates the optimal control problem of a monopolist s investments in process and product innovation under learning by doing in a dynamic setting we show that i there exists the saddle stable steady state under monopolist optimum and social optimum ii the learning rates of product and process innovation affect not only the monopolist s process or product innovation investments but also the complementarity substitutability relationship between product and process innovation iii the social incentive towards both product and process innovation is always larger than the private incentive characterizing the profit seeking monopolist these results are valuable complement and development to the results drawn from the standard product and process innovation model

an intertemporal general equilibrium asset pricing model the case of diffusion information this paper provides sufficient conditions for the equilibrium price system and a vector of exogenously specified state variable processes to form a diffusion process in a pure exchange economy the conditions involve smoothness of agents utility functions and certain nice properties of the aggregate endowment process and the dividend processes of traded assets in place of the dynamic programming a martingale representation technique is utilized to characterize equilibrium portfolio policies this technique is useful even when there does not exist a finite dimensional markov structure in the economy and thus the markovian stochastic dynamic programming is not applicable a gents are shown to hold certain hedging mutual funds and the riskless asset in contrast to earlier results the market portfolio does not have a special role in hedging since the markets are dynamically complete when there exists a finite dimensional markov system in the economy the dimension of the hedging demand identified through the markovian dynamic programming may be much larger than that identified by the martingale method copyright 1987 by the econometric society

product and process innovation with knowledge accumulation in monopoly a dynamic analysis abstract in this paper we investigate monopolist optimal investment levels using a dynamic model under knowledge accumulation we show that i investment decisions in product and process innovation are independent of each other ii under both the monopolist and the social optimum there exist the saddle stable steady state equilibria iii optimal investment levels in product and process innovation positive response to learning rate and knowledge accumulation rate inversely response to knowledge depreciation rate

incentive efficient production frontiers an agency perspective on dea in this paper we examine how empirical production frontiers may contribute to the incentives of production units we consider a series of data envelopment analysis dea frontiers and we show when these may be incentive efficient in the sense that they contain all the information that are relevant for optimal incentive provision the frontiers considered include the so called constant decreasing and varying return to scale models the free disposability and the free replicability models as well as the increasing and decreasing return to scale models based on a relaxed set of assumptions also we illustrate how to design optimal incentive schemes based on such frontiers contents 1 introduction 2 the incentive problem 3 production frontiers and productivity measures 4 incentive efficient production frontiers 5 extensions 6 an example 7 final remarks mathematical appendix references

shifting endpoints in the term structure of interest rates abstract this paper links the term structure to perceptions of monetary policy long horizon forecasts of short rates required by no arbitrage term structure models are heavily influenced by the endpoints or limiting conditional forecasts of the short rate process common assumptions that the short rate is mean reverting or contains a unit root are shown to generate unrealistic yield predictions failures occur because these assumptions inadequately account for historical shifts in market perceptions of the policy target for inflation this paper links endpoint shifts to agent learning about shifts in long term policy goals shifting endpoints in short rate processes significantly improve yield predictions

entropy law and exhaustion of natural resources is nicholas georgescu roegen s paradigm defensible abstract i examine whether the entropy law dictates absolute limits to growth i distinguish the entropy law proper diffusion without coherent work from its application the carnot cycle diffusion with coherent work while the entropy law pertains to mechanistic systems the carnot cycle is the result of purposeful agency since the economic process is carried out by purposeful agency to generate coherent work it is not governed by the entropy law rather it resembles the carnot cycle resources hence cannot be defined objectively a la the entropy law resources can only be defined relative to the purposeful agency thus the prognosticators of doom like georgescu roegen cannot be bolstered by the entropy law

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

sustainability economics where do we stand abstract environmental economics which is a branch of resource economics the environment as a scarce resource is essentially about market failures the costs of pollution and pollution abatement and the economics of regulation sustainability economics includes the problem of maintaining economic growth while reducing pollution and or its impacts with special attention to the linked problems of energy supply not to mention the supply other exhaustible resources climate change and most urgently fossil fuel consumption there is a need for integration of resource and environmental economics under a new rubric sustainability economics

pricing mortgage default and foreclosure delay this paper extends current mortgage pricing models to recognize the impact that delays between default and foreclosure have on the value of default to the borrower and the resulting value of the mortgage to investors the model explicitly captures potential costs through postforeclosure deficiency judgments and benefits in the elimination of negative equity and free rent that must be weighed at the time of default in determining whether the ultimate put option via allowing foreclosure is in the money the results provide policy implications concerning the operation of the fha insurance program copyright 1997 by ohio state university press

on the theory of international currency portfolios abstract the paper develops a general equilibrium theory of the optimal currency composition of international bond portfolios like the partial equilibrium portfolio balance literature of the 1980s the theory emphasizes the critical roles of government debt and government balance sheet operations in the determination of portfolios prices and allocations consistent with empirical findings optimal foreign currency positions are found to be small with their size decreasing with exchange rate volatility while optimal domestic currency positions are large and increasing with domestic interest rates a large open market purchase of domestic currency bonds from private households lowers domestic interest rates

gain loss asymmetric stochastic differential utility abstract this study examines a gain loss asymmetric utility in continuous time in which the investor discounts their utility gain by more than the utility loss by employing the theory of stochastic differential utility the model allows an endogenously time varying subjective discount rate in addition the model can express various forms of utility functions including a version of the epstein zin utility under the model even if the state variables do not have any jump in their paths the optimal consumption wealth ratio and portfolio weight can change non smoothly

moment based estimation of stochastic volatility abstract this paper makes use of the distributional information contained in high frequency data to test for the specification of the functional form of the volatility process within the class of stochastic volatility models it s calculus is implemented in order to obtain the first and second conditional moment of the driving stochastic differential equation for the volatility process these analytical expressions are augmented by their lag and lag squared and are used to form the corresponding gmm estimator the base case stochastic volatility model is extended to allow for the leverage effect and jumps in returns empirical estimation confirms the presence of fast mean reversion in volatility and jumps in returns for the 5 min s p 500 stock market index further estimation results also seem to indicate the presence of jumps in the volatility process that are correlated to the jumps in returns

long term trends in resource exergy consumption and useful work supplies in the uk 1900 to 2000 abstract our aim is to explain historical economic growth in the uk economy by introducing an empirical measure for useful work derived from natural resource energy inputs into an augmented production function to do this we estimate the long term 1900 2000 trends in resource exergy supply and conversion to useful work in the united kingdom the exergy resources considered included domestic consumption of coal crude oil and petroleum products natural gas nuclear and renewable resources including biomass all flows of exergy were allocated to an end use such as providing heat light transport human and animal work and electrical power for each end use we estimated a time dependent efficiency of conversion from exergy to useful work the 3 factor production function of capital labour and useful work is able to reproduce the historic trajectory of economic growth without recourse to any exogenous assumptions of technological progress or total factor productivity the results indicate that useful work derived from natural resource exergy is an important factor of production

dynamic pricing product and process innovation abstract the question of simultaneous dynamic pricing product and process investment policies is crucial for manufacturing and high tech industries this paper models these policies in an optimal control setting on the supply side the firm sets prices product and process investment levels over time on the demand side current demand depends on price and quality under an additive separable demand function dynamic pricing increases with quality and cost therefore both product innovation and process innovation impact the pricing policy under a multiplicative separable demand function dynamic pricing policy follows the dynamic of production cost and is independent of the evolution of product quality thus process innovation is the main determinant of a firm s pricing policy over time and product innovation has no impact

comparative dynamics of an equilibrium intertemporal asset pricing model this paper uses recursive competitive theory to develop a general equilibrium asset pricing model in this framework all prices and rates of return are endogenously determined thus enabling us to analyze the effects of changes in preferences technological uncertainty and expectations on the structure of security prices in particular we focus on how the market risk premium varies with changes in the underlying economic environment an issue which other asset pricing models have chosen not to address

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