international diversification works eventually critics of international diversification observe that it does not protect investors against short term market crashes because markets become more correlated during downturns although true this observation misses the big picture over longer horizons underlying economic growth matters more than short lived panics with respect to returns and international diversification does an excellent job of protecting investors

a country specific point of view on international diversification abstract this paper adds a country specific point of view on diversification among financial markets previous results indicate that emerging markets may generally exhibit higher diversification effects in comparison to developed markets due to lower market linkages however the question remains which markets in particular may be more or less attractive among emerging and developed markets as well as in a world market setting to the best of our knowledge this is the first empirical study which analyzes this question beyond continental levels only we analyze diversification by means of optimal portfolio allocations and in terms of tail risk reductions we also include investors tendency to overweight regional investments home bias our results show that malaysia switzerland jordan chile or singapore are markets with high diversification potential on the contrary argentina brazil and south korea exhibit high individual risk levels in combination with high market linkages

the role of market expectations in commodity price dynamics evidence from oil data abstract this paper examines the contribution of market expectations to commodity price dynamics it proposes a dynamic competitive storage framework with an explicit expectations shock along with concurrent shocks to study the commodity price movements this allows for a refined analysis of the expectations effect on price and inventory and the estimation of the expectations applied to the world crude oil market it finds that the contribution of market expectations to the crude oil spot price movements is limited from 1987 to 2014

dynamic perspectives on agricultural policy issues among the innovators fred waugh was one of the most prolific he made pioneering contributions in linear programming statistics and econometrics demand analysis the welfare effects of price risk and the analysis and explanation of commodity cycles as a research leader mentor and teacher at the usda he left his mark on the work of later generations of researchers i find myself no exception as will become clear from what i have to say in this paper even though i never met him in person my work has been influenced by what he wrote and by what his students wrote and taught among the many topics that interested waugh were the dynamics of free market behavior and the implications for policy formation in this paper i consider models of markets in which the dynamics run in two directions forward from current conditions to expectations of future prices and back from price expectations to current decisions both types of linkages can be crucial in competitive models of agricultural production in which land has a prominent role as the quintessential fixed asset a central challenge of market analysis from waugh s time till now has been to infer from market observations whether markets are behav

a reinterpretation of the optimal demand for risky assets in fund separation theorems in a continuous time portfolio selection model with n risky assets and k state variables driving their risk and return parameters we derive simple expressions for the allocation to each asset in the k 1 risky funds of the k 2 fund separation theorem we show that the allocation to any given risky asset in each fund can be written in terms of the parameters of a regression of the excess returns of this asset on those of the n 1 remaining assets we also use these parameters to provide quantitative measures of the increase in sharpe ratio of the speculative demand or in the maximum correlation of each hedging demand with respect to the corresponding risk factor associated with the introduction of a new asset in the investment universe finally we show that in a multiperiod setting an asset is spanned by others if and only if it improves neither the maximum sharpe ratio of the speculative demand nor the maximum correlations of the hedging demands with the risk factors this paper was accepted

evolution of the economics of agricultural policy agricultural economists helped develop farm programs to respond to the dire economic situation of the 1920s and 1930s some early authors appreciated that such policies created problems in markets for commodities and inputs over time our understanding of agricultural issues and policies has deepened through the application of improved models and tools of analysis to more extensive data we have developed better answers to old questions and have responded to changing policy instruments market contexts and policy concerns this article traces the evolution of our deepening economic understanding of the causes and consequences of agricultural policy

an experiment on risky choice amongst households a host of experiments have examined theories of risky choice using individuals however many important economic decisions are taken within multi adult households this paper reports on the first economic experiment designed to test theories of household choice we use established couples and face them individually and jointly with decisions involving monetary payoffs we find that joint choices typically are more risk averse than those made by individuals meanwhile choices made by couples exhibit the same kinds of departures from expected utility theory e g the common ratio and common consequence effects as are regularly recorded with individuals

global pricing of equity global equity management has historically been structured around country asset allocation this approach was supported by the observations that the country factor is the major source of influence on stock price behavior and that the correlation between equity and currency is close to zero and unstable if a corporation is regarded as a portfolio of international activities however its stock price should be influenced by international factors in relation to the geographical breakdown of its activities rather than where its headquarters is located or its stock is traded we examined a large cross section of security prices and found that regional factors and currency factors have a strong influence on asset returns beyond that of domestic factors moreover the sensitivity of individual company returns to nondomestic factors is closely related to the extent of their international activities as proxied by the relative importance of foreign sales to total sales we review the implications of these findings

computational economics and economic theory substitutes or complements abstract this essay examines the idea and potential of a computational approach to theory discusses methodological issues raised by such computational methods and outlines the problems associated with the dissemination of computational methods and the exposition of computational results we argue that the study of a theory need not be confined to proving theorems that current and future computer technologies create new possibilities for theoretical analysis and that by resolving these issues we will create an intellectual atmosphere in which computational methods can make substantial contributions to economic analysis

international asset pricing and portfolio diversification with time varying risk we test the conditional capital asset pricing model capm for the world s eight largest equity markets using a parsimonious generalized autoregressive conditional heteroskedasticity garch parameterization our methodology can be applied simultaneously to many assets and at the same time accommodate general dynamics of the conditional moments the evidence supports most of the pricing restrictions of the model but some of the variation in risk adjusted excess returns remains predictable during periods of high interest rates our estimates indicate that although severe market declines are contagious the expected gains from international diversification for a u s investor average 2 11 percent per year and have not significantly declined over the last two decades

global versus local asset pricing a new test of market integration should capital cost calculations be based on a global or local market benchmark the december 2000 redefinition of the morgan stanley capital international msci global equity index was a natural experiment addressing this question it is argued that this event triggered a portfolio shift by index funds large enough to affect the residual asset supplies constituting the global and local market benchmarks of all actively managed capital changes in the market benchmarks imply distinct and predictable changes to global and local stock betas exploring whether global or local beta changes best explain the cross section of event returns reveals that stocks in developed markets are priced globally and not locally jel g11 g14 g15

a simple model of endogenous agricultural commodity price fluctuations with storage a debate has been raging for centuries regarding the effects of interannual storage on commodity prices most analysts consider storage to function as a price stabilizer while others place it at the core of an explanation of intriguing features of commodity price series such as skewed distributions most studies have been developed in the context of the theory of competitive storage where random shocks affect supply or demand recently the endogenous chaotic behavior of markets has become another possible hypothesis regarding the origin of commodity price fluctuations we develop a nonlinear cobweb model with intra and interannual storage risk averse agents and adaptive expectations like the theory of competitive storage this nonlinear cobweb model with storage can reproduce some of the stylized facts of agricultural commodity prices autocorrelation of first rank low kurtosis and skewness in addition the effects of storage on price variation are mixed in the presence of interannual storage chaotic price series show less variation compared to a situation without interannual storage but we find that storage contributes to the endogenous volatility of prices by making chaotic dynamics more likely

crossing the lines the conditional relation between exchange rate exposure and stock returns in emerging and developed markets this paper examines the importance of exchange rate exposure in the return generating process for a large sample of non financial firms from 37 countries we argue that the effect of exchange rate exposure on stock returns is conditional and show evidence of a significant return impact to firm level currency exposures when conditioning on the exchange rate change we further show that the realized return to exposure is directly related to the size and sign of the exchange rate change suggesting fluctuations in exchange rates as a source of time variation in currency return premia for the entire sample the return impact ranges from 1 2 to 3 3 per unit of currency exposure and it is larger for firms in emerging markets compared to developed markets overall the results indicate that foreign exchange rate exposure estimates are economically meaningful despite the fact that individual time series results are noisy and many exposures are not statistically significant and that exchange rate exposure plays an important role in generating cross sectional return variation moreover we show that the relation between exchange rate exposure and stock returns is more consistent with a cash flow effect than a discount rate effect

inflation risk and international asset returns abstract we show that inflation risk is priced in international asset returns we analyze inflation risk in a framework that encompasses the international capital asset pricing model icapm of adler and dumas 1983 in contrast to the extant empirical literature on the icapm we relax the assumption that inflation rates are constant we estimate and test a conditional version of the model for the g5 countries france germany japan the uk and the us over the period 1975 1998 and find evidence of statistically and economically significant prices of inflation risk in addition to priced nominal exchange rate risk our results imply a rejection of the restrictions imposed by the icapm in an extension of our analysis to 2003 we show that even after the termination of nominal exchange rate fluctuations in the euro area in 1999 differences in inflation rates across countries entail non trivial real exchange rate risk premia

taxing fossil fuels under speculative storage long term environmental consequences of taxing fossil fuel usage have been extensively studied in the literature however these taxes may also impose several short run macroeconomic policy challenges the nature of which remains underexplored this paper investigates the mechanisms through which environmental taxes on fossil fuel usage can affect the main macroeconomic variables in the short run we concentrate on a particular mechanism speculative storage formulating and using a dynamic stochastic general equilibrium dsge model calibrated for the united states with an explicit storage facility and nominal rigidities we show that in designing environmental tax policies it is crucial to account for the fact that fossil fuel prices are subject to speculation the existence of forward looking speculators in the model improves the effectiveness of tax policies in reducing fossil fuel usage improved policy effectiveness however is costly it drives inflation and interest rates up while impeding output based on this tradeoff we seek an answer to the question how monetary policy should interact with environmental tax policies in our dsge model of fossil fuel storage we show that in an environment with no speculative storers monetary policy should respond to output along with cpi inflation in order to minimize the welfare losses brought by taxes however when the storage facility is activated responding to output in the monetary policy rule becomes less desirable

another look at the role of the industrial structure of markets for international diversification strategies abstract this paper re examines the extent to which gains from international diversification are due to differences in industrial structure across countries recent papers by roll 1992 journal of finance 47 3 42 and heston and rouwenhorst 1994 journal of financial economics 36 3 27 investigate this issue and find conflicting evidence using a new database the dow jones world stock index with coverage in 25 countries and over 66 industry classifications we decompose comprehensively both country and industrial sources of variation we confirm that little of the variation in country index returns can be explained by their industrial composition we also uncover differences in the proportion of variation in industry index returns that is captured by country and industry factors and discuss the implications for global diversification strategies

efficient estimation of conditional asset pricing models a semiparametric efficient estimation procedure is developed for the parameters of multivariate generalized autoregressive conditional heteroscedasticity in mean models when the disturbances have a conditional distribution assumed to be elliptically symmetric but otherwise unrestricted under high level assumptions the resulting estimator achieves the asymptotic semiparametric efficiency bound the elliptical symmetry assumption allows us to avert the curse of dimensionality problem that would otherwise arise in estimating the unknown error distribution this framework is suitable for the estimation and testing of conditional asset pricing models such as the conditional capital asset pricing model we apply our procedure in an empirical study of stock prices with monte carlo simulation results also reported

a new approach to measuring financial contagion this article proposes a new approach to evaluate contagion in financial markets our measure of contagion captures the coincidence of extreme return shocks across countries within a region and across regions we characterize the extent of contagion its economic significance and its determinants using a multinomial logistic regression model applying our approach to daily returns of emerging markets during the 1990s we find that contagion is predictable and depends on regional interest rates exchange rate changes and conditional stock return volatility evidence that contagion is stronger for extreme negative returns than for extreme positive returns is mixed

a commodity price process with a unique continuous invariant distribution having infinite mean we present a model of a storable commodity with a price process different from those usually associated with agricultural commodities or exhaustible resources this model has positive probability of zero output for consumption equal to zero price is infinite in any initial period with finite price the path of expected prices conditional on current information approaches infinity at a rate determined by the cost of storage and the variance also approaches infinity price is expected to fall with probability one in finite time successive price realizations are always correlated storage remains strictly positive and expected consumption exceeds a strictly positive bound there is a continuous limiting invariant distribution of price with infinite mean k

the welfare effects of the introduction of storage this paper examines the welfare effects of introducing storage into a market with stochastic supply in which all agents are competitive profit maximizers with rational expectations these welfare effects are the net result of the initial increase in demand for stock building and the partial and asymmetric reduction in the dispersion of consumption brought about by storage the distributional impacts depend crucially on the information available to producers before storage is introduced the elasticity of supply the specification of the consumption demand curve and the cost of storage

dynamic programming models and algorithms for the mutual fund cash balance problem fund managers have to decide the amount of a fund s assets that should be kept in cash considering the trade off between being able to meet shareholder redemptions and minimizing the opportunity cost from lost investment opportunities in addition they have to consider redemptions by individuals as well as institutional investors the current performance of the stock market and interest rates and the pattern of investments and redemptions that are correlated with market performance we formulate the problem as a dynamic program but this encounters the classic curse of dimensionality to overcome this problem we propose a provably convergent approximate dynamic programming algorithm we also adapt the algorithm to an online environment requiring no knowledge of the probability distributions for rates of return and interest rates we use actual data for market performance and interest rates and demonstrate the quality of the solution compared to the optimal for the top 10 mutual funds in each of nine fund categories we show that our results closely match the optimal solution in considerably less time and outperform two static newsvendor models the result is a simple policy that describes when money should be moved into and out of cash based on market performance

recovering individual preferences for non market goods a collective travel cost model traditional recreation demand models do not make a distinction between a household and an individual as the reference decision making unit thus assuming that a family maximizes a single utility function even if the family consists of different individuals such models ignore the possibility of family members divergent preferences for non market goods this study proposes a novel approach the collective travel cost model ctcm to eliciting individual preferences for a non market good such as a recreation site by using revealed preference data this approach accounts for the intra household resource allocation and the role of each household member s preferences we show that the collective travel cost model can be applied to estimating a recreation demand model that yields individual welfare estimates appropriate for policy analysis of non market goods such as the willingness to pay to access a recreation site we find that how resources are distributed within the household reflects significant differences in welfare measures

correlations in price changes and volatility across international stock markets the short run interdependence of prices and price volatility across three major international stock markets is studied daily opening and closing prices of major stock indexes for the tokyo london and new york stock markets are examined the analysis utilizes the autoregressive conditionally heteroskedastic arch family of statistical models to explore these pricing relationships evidence of price volatility spillovers from new york to tokyo london to tokyo and new york to london is observed but no price volatility spillover effects in other directions are found for the pre october 1987 period article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

the crash risks of style investing can they be internationally diversified the crash risks of momentum tend to be higher than those of size and value international diversification lowers the crash risks of size and value but not momentum the authors examined the conditional correlations and return co exceedances of style portfolios across countries and found that this difference in the effect of diversification is due to the left right tails of momentum size and value portfolios being more correlated than the right left tails across countries

can cross country portfolio rebalancing give rise to forward bias in fx markets abstract this paper develops a model of exchange rate dynamics that takes into account positions in foreign and domestic equities in addition to standard short term riskless securities the modeling of cross country stock holdings is motivated by evidence that a large and ever increasing proportion of currency flows has been directed toward national stock markets to the extent that there is not perfect risk sharing investors tend to hold currency risk and international equity risk as a bundle this paper examines the impact of such cross country covariance risk on the relationship between exchange rate returns and interest rate differentials in particular we show that the sign and magnitude of the coefficient on the lagged interest differential is governed by a type of time varying beta risk that reflects the conditional covariance between exchange rate returns and the return differential between foreign and domestic equities as this cross country beta is predominantly negative our results have direct implications on the empirical failure of the uncovered interest parity uip hypothesis suggesting that the traditional uip regression equation is confounded in a non standard nonlinear way by the presence of cross country equity flows simulation experiments show that accounting for such portfolio rebalancing activities may in part help to explain the anomalous slope coefficient associated with the forward premium

dynamic stock market covariances in the eurozone abstract this paper examines the short term dynamics macroeconomic sensitivities and longer term trends in the variances and covariances of national equity market index daily returns for eleven countries in the euro currency zone we modify colacito engle and ghysel s mixed data sampling dynamic conditional correlation garch model to include a new scalar measure for the degree of correlatedness in time varying correlation matrices we also explore the robustness of the findings with a less model dependent realized covariance estimator we find a secular trend toward higher correlation during our sample period and significant linkages between macroeconomic and market wide variables and dynamic correlation one notable finding is that average correlation between these markets is lower when their average gdp growth rate is lower or when more of them have negative gdp growth

do husbands and wives pool their resources evidence from the united kingdom child benefit common preference models of family behavior imply income pooling a restriction on family demand functions such that only the sum of husband s income and wife s income affects the allocation of goods and time testing the pooling hypothesis is difficult because most family income sources are not exogenous to the allocations being analyzed in this paper we present an alternative test based on a natural experiment a policy change in the united kingdom that transferred a substantial child allowance to wives in the late 1970s using family expenditure survey data we find strong evidence that a shift toward greater expenditures on women s clothing and children s clothing relative to men s clothing coincided with this income redistribution

the time variation of risk and return in the foreign exchange and stock markets this paper attempts to determine whether the fluctuations of conditional first and second moments which are observed for many assets are consistent with the sharpelintner mossin capital asset pricing model we test the mean variance model under several different assumptions about the time variation of conditional second moments of returns using weekly data from july 1974 to december 1986 that include returns on a portfolio composed of dollar deutsche mark sterling and swiss franc assets together with the u s stock market the results indicate that estimated conditional variances cannot explain the observed time variation of risk premia rates of return on international financial assets are characterized by statistical properties that are quite common to all financial markets they are highly volatile and largely unpredictable these properties make it very difficult to extract statistically reliable estimates of systematic exchange rate and assetprice movements and are at the root of the generally poor empirical performance of international asset pricing models nevertheless two important results have been uncovered by empirical researchers and can be considered a fair characterization of the data a expected returns on foreign assets vary over time cumby and obstfeld 1981 and the numerous articles that followed recently surveyed by frankel and meese 1987 b the volatility of returns of foreign assets also changes over time cumby and obstfeld 1984 hodrick and srivastava 1984 and hsieh 1988 among others as giovannini and jorion 1987 suggest the

portfolio selection an alternative approach this paper provides a solution to the portfolio diversification problem based on finding optimal weights that will result in maximizing the risk adjusted return of the underlying portfolio subject to the budget constraint contrary to the standard approach that aims at finding the required weights based on minimizing the variance of the portfolio subject to the budget constraint a mathematical proof is given for the suggested solution an application is provided to the portfolio diversification opportunity between all the share market indexes of the two largest economies in the world the results show that the portfolio created by our suggested approach leads to almost one percent increase in the risk adjusted return compared to the portfolio created by the standard method

can bank be a source of contagion during the 1997 asian crisis abstract this paper tests whether bank can be a source of contagion during the 1997 asian crisis using asset return data from a crisis country thailand in particular i examine whether thai banking sector can produce contagion effects in both conditional means and volatilities of its foreign exchange and stock markets during the crisis after controlling economic fundamentals the test results show that contagion in mean effects appear to be multidirectional since return shocks emanating from any one of the three markets can sweep across all markets but contagion in volatility effects are mainly driven by the negative return shocks originating in the banking sector overall the empirical evidence indicates that the past return shocks emanating from banking sector have significant impact not only on the volatilities of foreign exchange and aggregate stock markets but also on their prices suggesting that bank can be a major source of contagion during the crisis

the empirical merit of structural explanations of commodity price volatility review and perspectives this paper presents both the history of and state of the art in empirical modeling approaches to the world commodity price volatility the analysis builds on the storage model and key milestones in its development specifically it is intended to offer a reader unfamiliar with the relevant literature an insight into the modeling issues at stake from both a historical and speculative viewpoint the review considers primarily the empirical techniques designed to assess the merits of the storage theory it does not address purely statistical approaches that do not rely on storage theory and that have been studied in depth in other streams of the commodity price literature the paper concludes with some suggestions for future research to try to resolve some of the existing empirical flaws and hopefully to increase the explanatory power of the storage model

the incidence of market stabilising price support schemes the introduction of a stabilization scheme can raise or lower the wealth of initial owners of land and commodity stocks substantially even if the are risk neutral the incidence consists of the capitaliz ed value of the revenue changes along the path to the new stochastic steady state by ignoring the dynamic path traditional comparative statics understates the benefits to initial asset holders because of differences in dynamic paths destruction of the commodity can have a lower marginal deadweight loss than a public bu ffer stock and deficiency payments can be especially attractive when the variability is exogenous to the domestic market copyright 1988 by royal economic society

currency risk premia and uncovered interest parity in the international capm abstract zero investment uncovered interest parity uip portfolio positions provide perfect factor mimicking portfolios for currency risk in the international capm context their returns are the currency risk premia since the uip positions on average provide low returns the currency risk premia must be low so that currency risk appears not to be priced in an unconditional model however previous research has shown that uip returns are predictable and may be quite substantial conditionally we use this observation to generate a specific conditional version of the international capm a gmm approach shows that the conditional model performs well while the unconditional international capm is marginally rejected the paper thus argues that previous rejections of the international capm stem from the fact that currency risk premia are by nature low over extended periods of time and do not provide evidence against the international capm

emu and european government bond market integration in this study we adopt the capm based model of bekaert and harvey 1995 to compare the differences in the relative importance of two sources of systemic risk world and eurozone on government bond returns in two groups of countries in eu 15 results show that euro markets are less vulnerable to the influence of world risk factors and more vulnerable to emu risk factors however they are only partially integrated for their part the markets of the countries that decided to stay out of the monetary union present a higher vulnerability to external risk factors

lessons for international asset allocation on the positive side and despite rumors to the contrary there is little evidence that either stock or bond markets have become more volatile worldwide second correlations between markets remain low on the negative side however correlations do appear to increase when market volatility increases that is just when the diversification potential offered by low correlations is most needed furthernore while currency risk remains a small although signifcant component of total equity risk its contribution to fixedincome risk appears to be increasing

income treatment effects in contingent valuation the case of the swedish predator policy this paper provides case study evidence on two relevant issues in estimating the relationship between wtp and income using contingent valuation 1 the choice of income measure and 2 the modelling choice addressing these issues a sensitivity analysis is performed on a dataset concerning implementation of the swedish predator policy the results show that the estimated income elasticity of wtp varies between 0 12 and 0 40 for the models estimated the main conclusion drawn from the analysis is that controlling for the number of adults in the household is important for finding a significant income effect when the household income measure is used besides this finding the empirical analysis finds little support for the hypothesis that the choice of income measure and modelling assumptions significantly influence the overall model fit

financial education investor protection and international portfolio diversification abstract this paper investigates the effect of financial education on foreign portfolio investment we show that higher investor financial education fosters international diversification and that its role is particularly pronounced where information problems and monitoring costs are likely to be more severe that is in countries where protection of minority shareholders rights is weaker we interpret this evidence as supportive of the conjecture that financial education lessens the informational constraints binding foreign investors

learning and the monetary policy strategy of the european central bank abstract this paper examines the welfare implications of alternative inflation targeting proposals for the monetary policy of the european central bank we assume that policy makers have to learn the laws of motion of inflation in an economy characterized by stickiness in domestic price setting behavior and subjected to recurring shocks to productivity exports and foreign price we find that a switch from an asymmetric inflation targeting strategy to an symmetric makes little difference in welfare payoffs but it comes at a cost of much higher interest rate variability we also find that there are practically no welfare gains from switching from an inflation targeting strategy based on the harmonized index of consumer prices hicp to a strategy based on the domestic price component of the hicp

a new approach to international arbitrage pricing this paper uses a nonlinear arbitrage pricing model a conditional linear model and an unconditional linear model to price international equities bonds and forward currency contracts unlike linear models the nonlinear arbitrage pricing model requires no restrictions on the payoff space allowing it to price payoffs of options forward contracts and other derivative securities only the nonlinear arbitragepricing model does an adequate job of explaining the time series behavior of a cross section of international returns the idea that a few relevant state variables explain expected returns is the main driving force of the seminal papers of merton 1973 and ross 1976 these seminal ideas have been extended to the pricing of international assets by ikeda 1991 ross and walsh 1983 solnik 1974 1983 and stulz 1981 among others the key implication of these arbitrage pricing models is that only risks related to these factors state variables are relevant in determining asset prices testable implications of these international asset pricing models have been derived either by placing restrictions on the payoff structure i e payoffs are linear in factors as in ikeda 1991 ross and walsh 1983 and solnik 1983 or on the joint distributions of the payoffs and state variables as in constantinides 1989 these restrictions lead to the testable implication that expected asset returns are linear in the conditional covariances with the factor payoffs in what follows we refer to these models as linear arbitrage models or linear models

global biofuels key to the puzzle of grain market behavior these jumps in the prices of these three major grains have also revealed the these jumps in the prices of these three major grains have also revealed the chaotic state of economic analysis of agricultural commodity markets economists chaotic state of economic analysis of agricultural commodity markets economists and scientists have engaged in a blame game apportioning percentages of responand scientists have engaged in a blame game apportioning percentages of responsibility for price spikes to bewildering lists of factors which include a surge in meat sibility for price spikes to bewildering lists of factors which include a surge in meat consumption caused by unprecedented increases of income of the vast populations consumption caused by unprecedented increases of income of the vast populations of china and india idiosyncratic regional droughts and fi res speculative bubbles a of china and india idiosyncratic regional droughts and fi res speculative bubbles a new fi nancialization of grain markets the slowdown of global agricultural research new fi nancialization of grain markets the slowdown of global agricultural research spending jumps in costs of energy and fertilizers shifts in interest rates the decline spending jumps in costs of energy and fertilizers shifts in interest rates the decline of the dollar the surge in biofuels demands bans on genetically modifi ed plants of the dollar the surge in biofuels demands bans on genetically modifi ed plants and climate change several observers have claimed to identify a perfect storm in and climate change several observers have claimed to identify a perfect storm in the grain markets in 2007 2008 a confl uence of some of the factors listed above the grain markets in 2007 2008 a confl uence of some of the factors listed above the continuing confused state of the economics of grain price volatility may the continuing confused state of the economics of grain price volatility may seem odd after all grain markets have many of the features of textbook competiseem odd after all grain markets have many of the features of textbook competitive models the products are relatively uniform their primary producers and tive models the products are relatively uniform their primary producers and ultimate consumers are atomistic price takers prices and outputs in the united ultimate consumers are atomistic price takers prices and outputs in the united states and other developed countries are unusually well measured by the standards states and other developed countries are unusually well measured by the standards of most goods and services in the world economy with data freely available from of most goods and services in the world economy with data freely available from

pricing and storage of field crops a quarterly model applied to soybeans this paper considers the role of competitive storage in markets for annually harvested field crops a quarterly model is presented that considers the allocative role of storage both within and between crop years rational price expectations are endogenous variables calculated by a recursive method forward stochastic simulations using the model generate data that can be used to characterize the distributions of the variables in the base case the model is assigned parameter values from a quarterly econometric model of the u s soybean market the results shed light on the distributions of the quarterly variables including the rational price expectations and show how these distributions are affected by changes in the carrying charge

asking for individual or household willingness to pay for environmental goods implication for aggregate welfare measures the aggregate welfare measure for a change in the provision of a public good derived from a contingent valuation cv survey will be higher if the same elicited mean willingness to pay wtp is added up over individuals rather than households a trivial fact however once respondents are part of multi person households it becomes almost impossible to elicit an uncontaminated wtp measure that with some degree of confidence can be aggregated over one or the other response unit the literature is mostly silent about which response unit to use in wtp questions and in some cv studies it is even unclear which type has actually been applied we test for differences between individual and household wtp in a novel web administered split sample cv survey asking wtp for preserving biodiversity in old growth forests in norway two samples are asked both types of questions but in reverse order followed by a question with an item battery trying to reveal why wtp may differ we find in a test between samples that the wtp respondents state on behalf of their households is not significantly different from their individual wtp however within the same sample household wtp is significantly higher than individual wtp in particular if respondents are asked to state individual before household wtp our results suggest that using individual wtp as the response unit may overestimate aggregate wtp thus the choice of response format needs to be explicitly and carefully addressed in cv questionnaire design and further research in order to avoid the risk of unprofitable projects passing the benefit cost test

central bank learning terms of trade shocks and currency risk should only inflation matter for monetary policy this paper examines the role of interest rate policy in a small open economy subject to terms of trade shocks and time varying currency risks the private sector makes optimal decisions in an intertemporal non linear setting with rational forward looking expectations in contrast the monetary authority chooses an optimal interest rate reaction function given a loss function that is conditional on the state of the economy and given its least squares learning about the evolution of inflation and exchange rate depreciation the simulation results of the effects of different policy scenarios on welfare show that on balance the preferred stance should be strict inflation targeting

efficient intra household allocations a general characterization and empirical tests the neoclassical theory of demand applies to individuals yet in empirical work it is usually taken as valid for households with many members this paper explores what the theory of individuals implies for households that have more than one member we make minimal assumptions about how the individual members of the household resolve conflicts all we assume is that however decisions are made outcomes are efficient we refer to this as the collective setting we show that in the collective setting household demands must satisfy a symmetry and rank condition on the slutsky matrix we also present some further results on the effects on demands of variables that do not modify preferences but that do affect how decisions are made we apply our theory to a series of surveys of household expenditures from canada the tests of the usual symmetry conditions are rejected for two person households but not for one person households we also show that income pooling is rejected for two person households we then test for our collective setting conditions on the couples data none of the collective setting restrictions are rejected we conclude that the collective setting is a plausible and tractable next step to take in the analysis of household behavior

four approaches to commodity market stabilization a comparative analysis the effects of four alternative price stabilization programs for soybeans are compared using a rational expectations model and simulation for a given government expenditure subsidized private storage is the most efficient way to stabilize market price for a given deadweight loss a program of direct payments is the most efficient stabilizer of the effective farm price this program does not stabilize market price all four programs including a buffer stock program and one involving both direct payments and buffer stocks tend to destabilize quasi rent programs that involve an initial build up of stocks increase producer benefits and hurt consumers

household willingness to pay equals individual willingness to pay if and only if the household income pools abstract i show household and individual willingness to pay are equal if and only if household choices satisfy income pooling providing a test of whether the individual respondent speaks for the household an assumption implicit in much stated preference practice

individual and household willingness to pay for public goods the issue of whether willingness to pay wtp for the benefits generated by a public good should be elicited on an individual or on a household basis is addressed differences between individual and household wtp may arise when members of the household are mutually altruistic it is shown that for general specifications of altruism household wtp is less than the sum of household members individual wtp implications for the choice between household and individual measures of wtp are considered and issues in the elicitation of household wtp are addressed

the pricing of systematic liquidity risk empirical evidence from the us stock market abstract in this study we examine whether aggregate market liquidity risk is priced in the us stock market we define a bivariate garch 1 1 in mean specification for the market portfolio excess returns and the changes in the standardized number of shares in the s p 500 index the aggregate market liquidity proxy the findings based on monthly data suggest that systematic liquidity risk is priced in the us over the period january 1973 december 1997 the liquidity premium represents a non negligible negative and time varying component of the total market risk premium whose magnitude is not influenced by the october 87 crash

risk sharing and counter cyclical variation in market correlations abstract i present a consumption based dynamic asset pricing model in which international market correlations vary counter cyclically over time the driving force in the model is the time varying effective risk aversion induced by external habit formation market returns are driven by fundamental outputs and discount rates when risk aversion is high the effect of discount rates on market returns rises with the market price of risk to the extent that countries share risk the cross country correlation of discount rates exceeds the cross country correlation of fundamental outputs in bad times market correlations rise as returns are mostly driven by discount rates thus consistent with the empirical evidence periods of high risk aversion are associated with high market correlations and high market volatility after calibration my model is consistent with the observed variation in market correlations as well as other features of asset prices including the equity premium and market volatility

inflation targeting learning and q volatility in small open economies this paper examines the welfare implications of managing asset price with consumer price inflation targeting by monetary authorities who have to learn the laws of motion for both inflation rates the central bank can reduce the volatility of consumption as well as improve welfare more effectively if it adopts state contingent taylor rules aimed at inflation and q growth targets in this learning environment however under perfect model certainty pure inflation targeting dominates combined consumer and asset price inflation targeting

the role of sentiment in global risk premia this article examines the role of sentiment for global risk premia we analyse whether the global risk premia on macroeconomic fundamentals can be estimated more thoroughly if sentiment is included as additional conditioning information the analysis is performed in the framework of a conditional multiple beta pricing model the focus of analysis is the asset excess returns of the g 7 stock markets in the period from february 1999 to february 2012 the obtained results indicate that sentiment as conditioning information is able to contribute to the explanation of the general macroeconomic risk premia

excess comovement in international equity markets evidence from cross border mergers we examine the changes in betas from international mergers we find that the beta with respect to the acquirer s home market rises and that with respect to the target s home market falls the effect is large and robust with respect to controls for changes in the operations of the companies involved such an effect can occur only if international equity markets are not integrated we also find that the effect has not reduced over time that cross listings do not generally have a significant effect on international betas and that the u s and u k are more integrated internationally than other markets

the relationship between risk and expected return in europe abstract we employ midas mixed data sampling to study the risk expected return trade off in several european stock indices using midas we report that in most indices there is a significant positive relationship between risk and expected return this strongly contrasts with the result we obtain when we employ both symmetric and asymmetric garch models for conditional variance we also find that asymmetric specifications of the variance process within the midas framework improve the relationship between risk and expected return as an additional application we analyze the extent to which european stock markets are integrated which is a particularly relevant issue especially following the launch of the euro in january 1999 finally we propose a bivariate midas specification to test the pricing significance of the hedging component within an intertemporal risk return trade off with multiple european market indices

the effects of the introduction of the euro on the volatility of european stock markets abstract have convergence of european economies and introduction of the euro produced some effects on european stock markets theory suggests that stabilization of fundamentals should decrease variance of stock returns for historically unstable stock markets we test this proposition with daily data for the period january 1988 may 2000 and apply a three regime markov switching model for the variance covariance matrix among several stock indices including the uk and the us the analysis shows that introduction of the euro after an initial burst of volatility common to all european stock markets has indeed stabilized the spanish and italian stock markets

processing industry capacity and the welfare effects of sugar policies normally analysis of policies affecting commodities such as sugar employs long run comparative statics under certainty and ignores processing industries like cane sugar refining under the implicit assumption that the capital is malleable in both the short and long run we present a dynamic model calibrated to world sugar and solved with numerical dynamic programming that includes the specific capital of the refining industry when compared to an otherwise identical static model the dynamic model suggests that some 20 of welfare losses may be misattributed to cane sugar producers instead of refiners in contrast the difference between certainty and uncertainty proves to be unimportant

tests of the capm with time varying covariances a multivariate garch approach this paper examines an asset pricing model in which the sharpe lintner capm and the zero beta capm are special cases the model allows the ratio of expected market risk premium to market variance the conditional expected excess returns and the risks to change over time the results are found to be sensitive to the choice of the portfolio formation techniques significant time variability is shown in the conditional expected excess asset returns and risks and also in the reward to risk ratio

the role of exchange rates in intertemporal risk return relations abstract this paper investigates the significance of an intertemporal relation between expected returns on countries stock market portfolios and their risk exposures to the world market portfolio we find that the intertemporal risk return relation differs significantly under different currency denominations the slope coefficient is the largest at around seven when the returns are denominated in japanese yen moderate at about five when the returns are denominated in the canadian or us dollars and the smallest at around three when the returns are denominated in pound or euro and its predecessors the ranking of the risk return coefficients across different currency denominations remains the same when we replace country equity indices with global industry portfolios in estimating the intertemporal relations when we change the return frequency from monthly to daily and when we consider different specifications for the conditional covariance process

what s mine is yours the influence of male and female incomes on patterns of household expenditure this paper uses microdata from the 1992 statistics canada family expenditure survey to provide evidence that male and female incomes do not always exert identical influences on household expenditures the novelty of the paper lies in its demonstration that while incomes may be pooled for some categories of consumption e g housing the income pooling hypothesis must be rejected for others we also go beyond simply rejecting the pooling hypothesis to ask how male versus female income is used our results stress the on going importance of traditional gender roles for example we find that expenditures on child care increase only with women s incomes higher male income is not associated with higher expenditure on child care even when both spouses are full time full year paid workers

risk and household grain management in developing countries a dynamic model is presented of a household s joint production storage and trade decisions when facing transaction costs and risk in prices and yields grain management decisions balance the goals of maximising profits and reducing consumption price risk model solutions calibrated to chinese data show that grain s consumption role makes it an attractive form of precautionary saving even when households have access to credit the joint nature of production and savings decisions limits the income loss associated with risk coping and the desire to store grain can explain why subsistence households are frequently net purchasers but rarely net sellers of grain

dependence between the global gold market and emerging stock markets e7 1 evidence from granger causality using quantile and quantile on quantile regression methods this study examined the dependence between gold and stocks during 2002 18 in seven emerging countries the study combined the bivariate cross quantilogram introduced recently with quantile on quantile regression qqr approaches to conduct comprehensive and complementary analyses the qqr results for the full sample revealed a weak positive dependence in all the quantiles of gold and stock returns across all the countries selected during mild market conditions the results for pre and post crisis periods largely were consistent with those obtained for the full sample except for turkey pre crisis and china and indonesia post crisis the results of the causality test in mean return and that of the causality test in variance revealed no causal relation between stock and gold in the pre crisis period while causality ran only from gold to some stocks in the post crisis period further while there was volatility causality running only from gold to stocks during the pre crisis period the volatility causality between the two markets was very high during the post crisis period therefore we suggest that gold may have been a hedge for stocks during the pre crisis compared to the post crisis period further international risk factors should be considered in optimal investment decisions between domestic and global markets assets stocks and gold

anti hoarding laws a stock condemnation reconsidered economists have regarded anti hoarding laws as irrational reactions to nonexistent monopoly in the storage of grain this paper shows that anti hoarding laws cannot be rationally directed against a monopolistic storer for he will always store less not more than would be stored under competition but seemingly perverse competitive storage in the form of excessive stockholding can arise when a price ceiling distorts the market additional public storage exacerbates this perverse private behavior and may even induce behavior that appears to be active market manipulation under such circumstances anti hoarding laws can be desirable second best measures

price volatility and banking in green certificate markets there is concern that prices in a market for green certificates gcs primarily based on volatile wind power will fluctuate excessively leading to corresponding volatility of electricity prices applying a rational expectations simulation model of competitive storage and speculation of gcs the paper shows that the introduction of banking of gcs may reduce price volatility considerably and lead to increased social surplus banking lowers average prices and is therefore not necessarily to the benefit of green producers proposed price bounds on gc prices will reduce the importance of banking and even of the gc system itself

public good valuation and intra family allocation i derive values of marginal changes in a public good for two person households measured alternatively by household member i s willingness to pay wtp for the good on behalf of the household wtp i h or by the sum of individual wtp values across family members wtp c households are assumed to allocate their resources in efficient nash bargains over private and common household goods wtp i h is then defined by trade offs between the public good and the household good and wtp c by trade offs of between the public good and private goods wtp i h is found to be higher lower than wtp c when member i has a relatively high low marginal valuation of the public good but tends on average to equal wtp c as a consequence individuals tend to represent households correctly on average when questioned about the household s wtp for a public good even when they are purely selfish and answer truthfully adding all members wtp answers on behalf of the household then leads to double counting pure and paternalistic altruism the latter attached to consumption of the public good move each member s wtp on behalf of the household closer to the true sum of individual wtp but only paternalistic altruism raises this sum

the effects of price uncertainty on the factor choices of the competitive firm it is well known that if the price of a variable factor or of output is uncertain when the level of a quasi fixed factor must be chosen by a competitive firm the profit maximizing allocative choices differ from those made when all prices are fixed at their expected values the expected responses of input levels to price uncertainty depend on the characteristics of the production function but even their signs are difficult to determine empirically as they depend on among other parameters the third derivatives of the production function which are difficult to identify this paper shows that the response of the quasi fixed factor and the expected short run response of the variable factor are directly related to observable characteristics of the input demand and output supply functions but concentration on the responses of individual inputs provides only a partial view of the allocative effects of price uncertainty when the full effects on both factors are considered together both types of price uncertainty induce different biases in expected factor proportions relative to choices under certainty the directions of these biases cannot be inferred from results regarding the sign of the response of either factor viewed in isolation previous studies in this field include sandmo 11 batra and ullah 1 and holthausen 4 who showed that non neutral attitudes toward risk can affect the level of output and the amount of a quasi fixed input chosen by a firm faced with product price uncertainty stewart 12 showed a similar result for factor price uncertainty the above studies all assume explicitly or implicitly 6 4 that there is no reduction in price uncertainty between the time if any separating decisions on different inputs thus the usual distinction between short run and long run allocative decisions is ruled out turnovsky 13 showed that this assumption is crucial using a model which maintained an alternative assumption that firms could modify their planned output at additional cost after the selling price is known the effect of output price uncertainty on planned

household willingness to pay and income pooling a comment abstract we demonstrate some problems with munro 2005 household willingness to pay equals individual willingness to pay if and only if the household income pools economics letters 88 227 230 furthermore we reconsider income pooling in a slightly changed framework and prove income pooling implies that household willingness to pay is equal to minimal individual willingness to pay the converse is not true

international portfolio diversification currency industry and country effects revisited we examine the relative importance of country industry world market and currency risk factors for international stock returns our approach focuses on testing the mean variance efficiency of the various factor portfolios an unconditional analysis does not show significant differences between country industry and world portfolios nor any role for currency risk factors however when we allow expected returns volatilities and correlations to vary over time we find that equity returns are mainly driven by global industry and currency risk factors we propose a novel test to evaluate the relative benefits of alternative investment strategies and find that including currencies is critical to take full advantage of the diversification benefits afforded by international markets

stocks to use ratios and prices as indicators of vulnerability to spikes in global cereal markets we identify critical stocks to use ratios surs for major grains and for an index of total calories from these grains the latter appears to be a promising indicator of vulnerability to large price spikes when the current price shows no cause for concern more generally our results suggest that stocks data though no doubt unreliable can be valuable complements to price data as indicators of vulnerability to shortages and price spikes

a two season agricultural household model of output and price uncertainty abstract this paper presents a two season model of a household s production consumption labor supply and storage decisions in an environment of output and price risk the analytical results in this study are markedly different from those of models prevalent in the mainstream of the agricultural household literature the empirical analysis that uses panel data from a village in india provides support for the theoretical results and underscores the seasonal dimension of the farmers choice problems the results also show that ignoring risk or risk averse preferences may introduce substantial downward bias in optimal response estimates

why do markets move together an investigation of u s japan stock return comovements this article explores the fundamental factors that affect cross country stock return correlations using transactions data from 1988 to 1992 we construct overnight and intraday returns for a portfolio of japanese stocks using their nyse traded american depository receipts adrs and a matched sample portfolio of u s stocks we find that u s macroeconomic announcements shocks to the yen dollar foreign exchange rate and treasury bill returns and industry effects have no measurable influence on u s and japanese return correlations however large shocks to broadbased market indices nikkei stock average and standard and poor s 500 stock index positively impact both the magnitude and persistence of the return correlations stock return cross country covariances play a key role in international finance changes in these covariances affect the volatility of portfolios and asset prices as these covariances increase one expects that a fewer domestic risks are internationally diversifiable so portfolio volatility increases b the risk premium on the world market portfolio increases 1 c the cost of capital increases for individual firms and d the domestic version of the capm becomes increasingly inadequate 2 despite the important economic consequences of changes in cross country covariances the determinants of the levels and dynamics of these covariances have been little studied from an academic