the behavior of futures prices a review of theory and evidence how do futures prices behave the evidence indicates that they are typically a biased predictor of spot prices at maturity however the typical contention that this bias reflects the existence of a seasonal risk premium is not strongly supported by observations although futures markets are used by risk averse producers seeking the insurance offered by risk bearing speculators hedgers have been able to buy their insurance relatively cheaply in many cases even profiting from their futures trading speculators earnings seem to depend on their forecasting skills not on the mere existence of a risk premium other evidence suggests that the existence of a bias in a particular market owes more to the unique characteristics of the underlying commodity than to the market s structural characteristics tests of the random character of futures prices have found some degree of serial dependence but it is not clear whether these dependencies can be profitably exploited studies of the volatility of futures price indicate that volatility changes over the life of a contract the changes appear to depend upon distributions of the underlying state variables and the time to maturity with the seasonal state variable effect being dominant so that volatility may rise or fall over the contract s life multiperiod equilibrium pricing models of futures and forward contracts show that the futures and forward prices usually differ because of marking to market in the futures market unlike forward trading futures trading represents speculation on both the instantaneous interest rates and the spot prices consequently futures prices depend on the comovement of spot prices and interest rates

financial futures hedging via goal programming this paper presents multiperiod multiple objective goal programming as an alternative to the more conventional hedge ratio approaches to financial futures hedging the described model offers the potential benefits of i simultaneous achievement of multiple hedge related objectives i e minimization of transactions and margin opportunity costs regulation of cash flow and maximization of profits accruing from both the cash and futures positions and ii periodic modification and updating of the futures position as suggested by actual observed prices and interest rates throughout the hedging period to assess its overall effectiveness the model was applied to develop appropriate hedging strategies for three separate time periods each representing a unique interest rate trend i e upward movement downward movement and no change since real world implementation of the model requires the use of forecast data independent forecasts of both cash and futures prices were generated via 1 moving average 2 exponential smoothing and 3 random walk techniques in progressing through each of the 13 week time periods all forecasts were updated with the previous weeks actual price data revised forecasts and actual price data were then incorporated into the model constraints on a weekly schedule this approach in essence provided weekly futures activity recommendations based on the most recent price and interest rate developments observed at any point during the hedging period the realized gains or losses were then compared to the previously derived perfect foresight model results and to the traditional hedge ratio results this allowed for evaluation of the model s effectiveness under varying forecast methods and varying interest rate trends the results show that the goal programming model outperformed other strategies in most cases

debt futures and options optimal price linked financial contracts under moral hazard and limited liability this paper characterizes the optimal financial contract between a risk neutral entrepreneur and risk neutral lender investors when the entrepreneur has limited liability there is moral hazard and the investor payoff function can depend on both output and output price but is nondecreasing in output in this setting the optimal contract is a price contingent commodity bond that can be replicated by combining pure debt commodity futures and commodity call option contracts although a pure commodity bond contract is sometimes optimal a pure debt contract is almost never optimal various properties of the entrepreneur s optimal price contingent promised payment are described copyright 1993 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

valuing agricultural firms an examination of the contingent claims approach to pricing real assets abstract uncertainty about prices output demand and managerial decisions is not easily incorporated into a valuation model for real assets however techniques originally developed in the option pricing literature can accommodate these complexities this paper examines the contingent claims approach to valuing real assets a model for the value of an agricultural producer is derived optimal shutting and reopening volatile output and demand and other realistic features are included the model differs markedly from conventional discounted cash flow models empirical tests using prices of rubber and palm oil estates listed on the stock exchange of singapore offer some support for the model

industrial pollution in economic development the environmental kuznets curve revisited abstract using new international data this paper tests the environmental kuznets curve ekc hypothesis for industrial water pollution we measure the effect of income growth on three determinants of pollution the share of industry in national output the share of polluting sectors in industrial output and end of pipe eop pollution intensities per unit of output in the polluting sectors we find that the industry share of national output follows a kuznets type trajectory but the other two determinants do not when combined our results imply rejection of the ekc hypothesis for industrial water pollution it rises rapidly through middle income status and remains roughly constant thereafter

credit spreads an empirical analysis on the informational content of stocks bonds and cds this paper explores the dynamic relationship between stock market implied credit spreads cds spreads and bond spreads a general vecm representation is proposed for changes in the three credit spread measures which accounts for zero one or two independent cointegration equations depending on the evidence provided by any particular company empirical analysis on price discovery based on a proprietary sample of north american and european firms and tailored to the specific vecm at hand indicates that stocks lead cds and bonds more frequently than the other way round it likewise confirms the leading role of cds with respect to bonds

the effects of decision making on futures price volatility existing literature on commodity futures price volatility emphasizes time to expiration and the resolution of uncertainty in this paper we stress the supply and demand inflexibilities arising from decision making a decision made on the supply demand side makes future supply demand responses less elastic therefore a shock arising after a decision is made is more effective in changing the futures price than a shock before the decision is made the results support the time to maturity hypothesis but do not conflict with the state variable hypotheses of futures price volatility evidence supporting the impacts of inflexibilities are presented for corn soybean and wheat contracts

optimal bank reorganization and the fair pricing of deposit guarantees abstract when should regulators close a financially ailing bank fdic practice in the us has moved in the direction of early closure in contrast banking regulators in japan continue to follow a more patient approach this paper analyses a series of models in which closure rules and bailout policies arise endogenously through the interaction of i regulators attempts to minimize discounted expected bankruptcy costs and ii equity holders incentives to recapitalise banks we characterize subsidy policies for distressed banks that implement socially optimal closure rules at minimum financial cost to regulators and which reduce moral hazard

the minimum variance hedge ratio under stochastic interest rates in an environment where interest rates are stochastic we examine the case of a pure hedger endowed with a fixed position in a long term bond in contrast to conventional wisdom according to which the difference between hedging through forward contracts and futures is immaterial it turns out that the minimum variance hedge ratio using forwards comprises two terms instead of one only when using futures the magnitude of the difference between the two hedge ratios may be important under some plausible assumptions this result is due to the presence of additional interest rate risk that bears on the profit and loss statement associated with the forward position this sheds some additional light on the respective features of forward and futures contracts written on interest rate sensitive securities

pricing default swaps empirical evidence in this paper we compare market prices of credit default swaps with model prices we show that a simple reduced form model outperforms directly comparing bonds credit spreads to default swap premiums we find that the model yields unbiased premium estimates for default swaps on investment grade issuers but only if we use swap or repo rates as proxy for default free interest rates this indicates that the government curve is no longer seen as the reference default free curve we also show that the model is relatively insensitive to the value of the assumed recovery rate

grain price expectations of illinois farmers and grain merchandisers the study s purpose is to measure the extent to which futures and option prices reflect the subjective price distribution of a subset of market participants farmers and grain merchandisers in illinois findings suggest that in most instances the futures price is an appropriate proxy for expected price however volatilities implied by option premia usually overestimate the subjective variances of producers and merchandisers these differences between individual and market expectations of variance are consistent with findings of overconfidence in the psychology literature and should be considered by analysts when making observations about hedging decisions and risk aversion

an equilibrium analysis of hedging with liquidity constraints speculation and government price subsidy in a commodity market we develop a simple commodity model to analyze i the effects of hedgying with liquidity constraints due to producers inability to bear unlimited trading losses ii the role of speculation in the process of risk allocation between consumers and producers and iii the equilibrium implications of government price subsidies to the producers we find that 1 liquidity constraints can cause futures prices to exhibit mean reversion which then makes speculation profitable 2 speculation tends to make futures price volatility an increasing function of futures price and 3 government price subsidy if actively hedged by the producers serves to lower the futures risk premium and reduce futures volatility commodity spot and futures prices are determined by the following types of market participants producers consumers speculators and governments producers have generally taken short futures positions in order to hedge against price declines consumers have generally taken long futures positions in order to hedge against price increases speculators who neither produce nor intend to consume the commodity are present in the spot and futures markets for the purpose of making a profit governments play significant roles in the markets by providing producers with various support programs and in some cases by directly intervening in the markets to affect commodity prices or adjust inventory levels the traditional approach to commodity futures pricing has been based on the theory of storage 1 as fama and french 1987 1988 show this approach to commodity pricing is particularly useful for explaining the basis movement as a function of inventory levels based on the hypothesis that the marginal convenience yield on inventory declines at a decreasing rate as

the time pattern of hedging and the volatility of futures prices the paper proposes a multi period model of hedging which allows for a futures position to be revised within the cash market holding period within this framework we assess the robustness of the two period theory of hedging when generalized to many periods we characterize the normal time path of a hedge and the way it is affected by the requirement that futures accounts mark to market daily finally we show how the resolution of production uncertainty over time affects hedging behavior and determines the volatility of futures prices in the large literature on hedging in futures markets the principal analytical accounts of hedging are framed in a two trade date setting an agent commits himself now to a future purchase or sale of a good whose cash price later is uncertain this risk is hedged by purchase or sale of an appropriate number of futures contracts and holding this futures position until the cash transaction is realized in the present paper we formulate a multi period model of hedging which allows for the futures position to be revised within the cash market holding period the resulting analysis captures an important institutional reality that is absent in a two trade date model namely the fact that the day to day fluctuations of the futures price will generate a series of random cash flows over the period during which a futures position is held this is due to the requirement that futures accounts mark to market daily within this framework we address a number of issues first we assess the robustness of the two period theory of hedging when generalized to many periods second we characterize the normal time path of a hedge and contrast futures and forward contracts from the perspective of an individual hedger finally we show how the resolution of production uncertainty over time affects hedging behaviour and determines the volatility of futures prices while the literature on asset demand in a multiperiod setting is large futures markets are specifically treated in a limited number of studies grauer and litzenberger 1976 are concerned principally with characterizing the relation of spot and futures prices in a market for a storable periodically produced commodity they offer a rationale for positive stock holding in markets where spot price exceeds the futures price richard and sundaresan 1980 are also concerned primarily with characterizing price behaviour since they posit identical consumers in equilibrium individual holdings of futures are zero there is no hedging activity in the sense that we understand it breeden 1980b analyzes the optimal futures position sizes in a multiperiod setting his framework is more general than ours in that his is a multi good multi asset model where preferences

default premiums in commodity markets theory and evidence we model the effect of nonperformance risk on forward and futures pricing and look for evidence of nonperformance risk in precious metals futures prices from the hunt brothers episode changes in default premiums are measured and related to the sequence of events in the metals markets during this period results suggest first that ex ante costs of nonperformance can be a significant priced factor in commodity markets and second that the arrival of new information is often associated with changes in these costs the evidence has implications for both theoretical and empirical research on commodity markets organized commodity markets offer traders an efficient medium in which to execute their hedging and speculative strategies in particular the markets have developed mechanisms that reduce the costs of nonperformance which would be substantial in the absence of an organized exchange devices such as margin requirements position limits daily marking to market price limit moves and the clearinghouse reduce the expected costs of distress and default in commodity markets while organized exchanges greatly reduce expected costs of nonperformance they do not eliminate such costs throughout the history of organized futures trading there have been many instances of markets collapsing or coming to the brink of collapse after a period of unusual trading activity the most prominent example in recent times is the near collapse of the new

the behavior of forward looking firms in the very short run the study develops a theory of very short run forward looking behavior allowing for forward trading and storage of final good and material input production and storage are separable from hedging decisions and depend only upon current forward and cash prices comparative statics are derived regarding production purchases and sales the hypotheses advanced are tested with monthly data pertaining to the u s soybean processing industry results suggest that in short run equilibrium futures prices of the soybean complex have had little influence on crushings or production but they have been important determinants of inventory levels

political and economic inequality and the environment abstract this paper analyzes and tests the hypothesis that political and economic equality result in lower levels of environmental degradation based on formal statements of the argument put forward by boyce r 1994 ecological economics 11 169 178 i show that equality may or may not be necessary to minimize degradation under some plausible conditions greater inequality may even be conducive to lower degradation actual results depend primarily on the intersection between the distribution of preferences across groups and the institutional rules two cross national empirical tests tend to support the contention that distributional issues do not systematically explain variations in environmental quality the results reinforce the conclusion that assumptions about the structure of preferences and workings of social choice institutions ignore complex interactions which influence the relationship between degradation and equality

optimal hedging and equilibrium in a dynamic futures market abstract this paper considers an agent maximizing the expected utility of the sum of the terminal value of a fixed portfolio of spot market assets and the terminal value of a margin account on a futures trading position closed form solutions for the optimal hedging strategy are provided in several special cases

green and brown globalization and the environment globalization viewed as a process of economic integration that embraces governance as well as markets could lead to worldwide convergence toward higher or lower environmental quality or to environmental polarization in which the greening of the global north is accompanied by the browning of the global south the outcome will not be dictated by an inexorable logic rather it will depend on how the opportunities created by globalization alter balances of power within countries and among them copyright 2004 oxford university press

optimal dynamic hedging in unbiased futures markets a discrete time dynamic hedging problem is solved under expected utility maximization and basis risk without imposing a particular parametric form for utility nor assuming normally distributed cash and futures prices the solution is valid for any increasing and strictly concave utility function and for quite general specifications of the joint distribution of cash and futures prices this generality is achieved by restricting the futures market to be unbiased and requiring that the size of the cash position be nonstochastic the dynamic hedging rule can be estimated empirically using similar methods to those used to estimate static hedge ratios

landlords and farmers implications of disparities in bargaining power for tenancy in agriculture abstract the equilibrium allocation of owner operated and rental land in the agricultural sector is examined given risk averse agents risky returns and asset price risk the model is extended to account for disparities in bargaining power among landlords and farmers in the absence of disparities the competitive equilibrium allocation satisfies the general conditions for optimal risk sharing with an adjustment factor similar to the optimal hedge ratio differences in bargaining power result in deviations from the optimal risk sharing conditions numerical simulations of tenancy structure are conducted for a developed agricultural economy exposed to various forms of risk estimates of parameter values representing the riskiness of returns and asset prices in this study are based on vector auto regressive techniques the simulations show that a substantial reduction of the rental ratio is obtained in a situation where farmers are equally or more risk averse than landlords consequently the results indicate that the importance of the tenancy institution as a risk sharing mechanism is severely mitigated in the presence of asset price risk risky returns relatively risk averse farmers and disparities in bargaining power

application of the modified tobin s q to an uncertain energy saving project with the real options concept abstract this paper is to develop a modified tobin s q evaluation method which successfully combines the evaluation criteria of the traditional tobin s q and the real options this study provides flexible thinking for decision making criteria that is it clearly provides decision makers with a reference in choosing enter or exit strategies such as quantitative indicators references the proposed model introduces two variables stochastic process in continuous time and explores the impact of the occurrence of unexpected events on the project value so that it can more authentically response to the project value the studied issue deals with the firms that have not established energy saving equipment yet it attempts to figure out the optimal timing to adopt an energy saving investment project when it is beneficial and the optimal timing to terminate it when the continuous operation of that business is unprofitable the future discounted benefit cost ratio q follows the geometric brownian motion with the poisson jump process and the replacement of investment equipment except for the evaluation of energy saving equipment investment project the proposed model can be applied to other related project evaluation issues such as energy saving co 2 emission reduction or general investment projects

testing the martingale hypothesis in deutsche mark futures with models specifying the form of heteroscedasticity summary we examine the form of heteroscedasticity in deutsche mark futures price data and compare different specifications of the particular way that the variance is changing over time the martingale hypothesis is tested with daily and weekly rates of change of futures prices for the deutsche mark and some evidence is found against this hypothesis in analyses of daily data from 1981 to 1985 this rejection of the martingale hypothesis may be attributed to trading day effects in foreign currency prices and the resulting day of the week patterns in futures prices when the martingale hypothesis is tested with weekly data the null hypothesis is retained

method in the madness a political economy analysis of the ethnic conflicts in less developed countries this paper is an attempt from a political economist s point of view to look for some clear patterns in the horrendous complexities of the ethnic and sectarian conflicts that are raging in less developed countries we emphasize the importance of some institutional failures such as the decline of mediating institutions or of preexisting structures of credible commitment rather than mere cultural and historical animosities behind the collapse of interethnic understandings and compromises the rise in ethnic conflicts is not always associated with economic deterioration sometimes quite the contrary the effects of market expansion are also ambiguous in our discussion of policy lessons we have tried to look for various ways both political and economic of constructing institutionalized incentives for conciliatory actions

information as regulation the effect of community right to know laws on toxic emissions abstract there is growing academic and policy level interest in the use of information as quasi regulatory mechanisms such as toxic release inventory tri and green labels mandatory disclosure requirements have been touted as market based incentives that may affect firm behavior we provide new evidence on the effectiveness of disclosure requirements by examining firm behavior in response to disclosures of tri emissions we find that firms with the largest stock price decline on the day this information became public subsequently reduced emissions more than their industry peers this is consistent with the view that financial markets may provide strong incentives for firms to change their environmental behavior

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

the shading and distancing of commerce when internalization is not enough abstract a political economy of degradation and of sustainability should account not only for the full range of production costs but the sources of those costs it should consider how the pursuit of wealth can deliberately or not lead to uncounted costs and unaccountable actors this article explores the conditions of cost generation and externalization especially those that are largely unintended and inadvertent it shows how the pursuit of wealth the expansion of markets the mobility of capital and the entanglements of production processes can lead to the unwitting generation and displacement of costs it analyzes competitive business strategy and patterns of production and consumption for their contribution to such costs business strategy and state policy tend to create a never ending search for frontiers however simulated and however unecological they may be the costs generated in those frontiers are a function of shading that is obscuring of costs and distancing the separation of production and consumption decisions both of which impede ecological and social feedback and create cognitive institutional and ethical lags between initial benefits and eventual full costs as distance increases along dimensions of geography culture bargaining power or agency negative feedback loops are severed stakeholders expand while decision making contracts environmental problems are displaced and shading and cost externalization increase the likelihood of sustainable resource use increases as distance is lowered as institutions locate decision authority in those who receive negative ecological feedback and who have the capacity and incentives to act on that feedback and as the burden of proof for economic interventions shifts to the interveners

power distribution the environment and public health a state level analysis abstract this paper examines relationships among power distribution the environment and public health by means of a cross sectional analysis of the 50 us states a measure of inter state variations in power distribution is derived from data on voter participation tax fairness medicaid access and educational attainment we develop and estimate a recursive model linking the distribution of power to environmental policy environmental stress and public health the results support the hypothesis that greater power inequality leads to weaker environmental policies which in turn lead to greater environmental degradation and to adverse public health outcomes

testing for weak form efficiency of crude palm oil spot and future markets new evidence from a garch unit root test with multiple structural breaks there is a sizeable literature that tests for weak form efficiency in commodity and energy spot and future prices while many studies now allow for multiple structural breaks to address the criticism that conventional unit root tests have low power to reject the unit root null in the presence of structural change the extant literature overlooks the fact that conventional unit root tests are biased in the presence of conditional heteroscedasticity we apply a recently developed generalized autoregressive conditional heteroscedasticity garch unit root test with multiple structural breaks to crude palm oil spot and future prices and find much more evidence against weak form efficiency than that found using tests that fail to allow for conditional heteroscedasticity our results point to the importance of allowing for heteroscedasticity when testing for efficiency in commodity and energy spot and future prices

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

optimal storage by crop producers when post harvest marketing strategies are restricted by disallowing speculative purchases sales out of storage becomes an irreversible decision and the dynamic marketing problem becomes analogous to the optimal exercise of a financial option the optimal marketing strategy is to hold at low prices and to sell at high prices with a cutoff price function marking the boundary between low and high prices a method for estimating the cut off price function is developed and applied to illinois soybean prices the decision rule is demonstrated to result in substantial gains from storage copyright 2002 oxford university press

seasonal patterns of futures hedging and the resolution of output uncertainty abstract optimal futures hedging is examined in a two good model with stochastic output and sequential information arrival a producer s optimal hedge depends on demand elasticity sensitivity of his output to weather his correlation with aggregate output and how rapidly his output uncertainty is resolved relative to other producers during different seasonal periods because regional output uncertainties are resolved at different times the optimal futures position of a grower will commonly reverse in direction during the crop year a producer with non stochastic output who faces price risk arising from demand shocks may remain unhedged or even maintain a long position

trade and the environment from a southern perspective the relationship between free trade and the environment is one of the main issues of contention between environmental and ecological economics environmental economics assumes a positive relationship between free trade economic growth and environmental policies environmental externalities may cause important damage however trade is not to be blamed for this instead the fault lies with policy inadequacies at the national level on the other hand some ecological economists criticise the assumptions of environmental economics especially the immobility of production factors and the positive correlation between income and environmental quality they plead for measures to prevent deterioration of northern environmental standards in a race to the bottom due to ecological dumping from the south in this paper we argue that neither environmental economics nor northern ecological economics take into account the structural conditions determining the international trade system based on some new empirical evidence on material flows we stress the notion of environmental cost shifting if physical and political ecology perspectives are adopted a southern approach to the trade and environment issue may arise 2001 elsevier science b v all rights reserved

the planting real option in cash rent valuation after entering into a farmland cash rent contract in the fall a tenant farmer has flexibility over the spring crop choice and the input application level failure to account for these options will bias estimates of what farmers should pay to rent land applying monte carlo simulation methods this study investigates the option values for these choices a multivariate gaussian copula mgc is employed to account for dependence among yields and prices results show that the average cash rent valuation for the real option approach is 33 6 higher than that for the conventional net present value npv method in which the input intensity option is 0 9 crop planting sequence is shown to impact the real option value

effects of physical distancing to control covid 19 on public health the economy and the environment physical distancing measures are important tools to control disease spread especially in the absence of treatments and vaccines while distancing measures can safeguard public health they also can profoundly impact the economy and may have important indirect effects on the environment the extent to which physical distancing measures should be applied therefore depends on the trade offs between their health benefits and their economic costs we develop an epidemiological economic model to examine the optimal duration and intensity of physical distancing measures aimed to control the spread of covid 19 in an application to the united states our model considers the trade off between the lives saved by physical distancing both directly from stemming the spread of the virus and indirectly from reductions in air pollution during the period of physical distancing and the short and long run economic costs that ensue from such measures we examine the effect of air pollution co benefits on the optimal physical distancing policy and conduct sensitivity analyses to gauge the influence of several key parameters and uncertain model assumptions using recent estimates of the association between airborne particulate matter and the virulence of covid 19 we find that accounting for air pollution co benefits can significantly increase the intensity and duration of the optimal physical distancing policy to conclude we broaden our discussion to consider the possibility of durable changes in peoples behavior that could alter local markets the global economy and our relationship to nature for years to come

forward and futures markets and the competitive firm under price uncertainty recent remedies for managing the output price risk faced by a competitive firm sometimes include the prescription of hedging this practice usually entails combining spot market sales with trading opportunities in forward or futures markets the forward hedge represents a risk free price the futures hedge offers a risky alternative which arises because of basis the variable relationship between the spot and futures quotations rather than treating forward and futures as mutually exclusive or as perfect substitutes a competitive firm can carefully construct a portfolio which combines spot forward and futures positions holthausen 9 and feder just and sclmitz 5 hereafter fjs initiate an extensive discussion of a risk averse firm which uses futures contracts when faced with an uncertain output price but no basis risk both articles employ general utility and density functions to derive their results their conclusions include independence of the production decision from the probability density of the spot price and the firm s degree of risk aversion extensions of these two articles usually focus on the robustness of the separation conclusion to either the addition of basis or the addition of production uncertainty to the models the risk free characteristic that holthausen and fjs attribute to futures contracts really better describes a forward contract jarrow and oldfield 11 paul heifner and helmuth 17 and many others document the importance of recognizing the unique charapteristics of these two different types of contracts batlin 2 builds on the holthausen and fjs foundation by adding basis risk to his model fjs explicitly qualify their model as applicable to only those commodities with little or no production uncertainty subsequent articles augment their analysis with the condition of stochastic production chavas and pope 3 anderson and danthine 1 marcus and modest 15 ho 8 and grant 6 all include production uncertainty in different permutations of the fundamental model those which simultaneously include both basis and production risk achieve analytical solutions by assuming specific utility or density functions

a note on futures markets with small price and production risks when the spot price and production risk are jointly normally distributed the mean variance approach has little theoretical justification the authors use taylor approximations instead and show the three results one farmers hedge less than expected production when the futures price is less than or equal to the expected spot price two when the futures price equals the expected spot price farmers facing production risk produce less than those without production risk three normal backwardation contango prevails in the markets when correlation between the spot price and production risk is smaller greater in absolute value than the ratio of coefficients of variation of these variables copyright 1992 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

forward markets currency options and the hedging of foreign exchange risk abstract although transactions exposure to foreign exchange risk can be completely hedged in the forward market the same is not true for economic exposure we show that in some cases a portfolio of currency options can be constructed which hedges economic exposure when the firm has ex post production flexibility in the more general case of uncertainty in multiple exchange rates however more elaborate options than those currently available are required to hedge economic risk completely

toxics release information a policy tool for environmental protection abstract this study examines investor reactions to the repeated public disclosure of environmental information about firms in the chemical industry and the effectiveness of this information as a decentralized mechanism for deterring their pollution by allowing investors to benchmark the performance of firms repeated provision of the toxics release inventory led firms to incur statistically significant negative stock market returns during the one day period following the disclosure of that information in the years 1990 1994 these losses had a significant negative impact on subsequent on site toxic releases and a significant positive impact on wastes transferred off site but their impact on total toxic wastes generated by these firms is negligible

the samuelson hypothesis in futures markets an analysis using intraday data this paper considers the samuelson hypothesis which argues that the futures price volatility increases as the futures contract approaches its expiration utilizing intraday data from 20 futures markets in six futures exchanges we find strong support for the samuelson hypothesis in agricultural futures however the samuelson hypothesis does not hold for other futures contracts we also provide supporting evidence that the negative covariance hypothesis is the key factor for the empirical support of the samuelson hypothesis in addition our findings remain largely unaltered even after we control for seasonality and liquidity effects

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

more reasons why farmers have so little interest in futures markets the use by farmers of futures contracts and other hedging instruments has been observed to be low in many situations and this has sometimes seemed to be considered surprising or even mysterious we propose that it is in fact readily understandable and consistent with rational decision making standard models of the decision about optimal hedging show that it is negatively related to basis risk to quantity risk and to transaction costs farmers who have less uncertainty about prices and those with a diversified portfolio of investments have lower optimal levels of hedging if a farmer has optimistic price expectations relative to the futures market the incentive to hedge can be greatly reduced and finally farmers who have low levels of risk aversion have little to gain from hedging in terms of risk reduction in that the certainty equivalent payoff at their optimal hedge may be little different than the certainty equivalent under zero hedging these reasons are additional to the argument of simmons 2002 who showed that if capital markets are efficient farmers can manage their risk exposure through adjusting their leverage obviating the need for hedging instruments

monopoly manipulation and the regulation of futures markets in the textbook model of competition all buyers and sellers are tiny compared with the market as a whole these people trade fungible commodities in an ongoing auction every seller s product is the same as every other s all participants in the market are sophisticated every buyer continues to purchase so long as the price is less than the value he places on the commodity every seller continues to sell so long as the price is greater than the marginal cost of production new buyers and sellers can jump in at an instant s notice and if they find the going rough they can jump out again no one can take advantage of a trading partner because someone else will offer the prospective victim a better deal information about bids and offers spreads instantly to all participants and would be entrants every beneficial trade takes place the trading leads to an outcome that is best for each buyer each seller and society as a whole of course textbook economies occur only in textbooks it is commonplace to lament the fact that traders are not microscopic compared with the market traders are gullible entry and exit

fair trade and free entry can a disequilibrium market serve as a development tool abstract the fair trade ft coffee initiative attempts to channel charity from consumers to poor producers via increased prices we show that the rules of the ft system permit this rent to be eliminated due to free entry and costly excess certification of output using data from an association of coffee cooperatives in central america we verify that expected producer benefits are close to 0 when we take into account the output that is certified but not sold as ft our results illustrate how free entry undermines the attempt at extending charity via a price distortion in an otherwise competitive market

world inequality and globalization the article assesses recent attempts to measure the level and changes in world inequality it compares results based on country averages population weighted inter country gini coefficients and combinations of inter country and intra country distribution figures most measures agree that inequality grew up to 1980 some suggest that it stabilized or declined slightly after that date but that conclusion is not definitive the article argues against reliance on single indicators to measure world inequality as opposed to looking at various measures including inequality between regions and the ratios of incomes of the poor and the rich according to several of these measures inequality has continued to grow the addition of variables other than income life expectancy and education appear to reduce inequality but this is largely an illusion copyright 2004 oxford university press

optimal bank reorganization policies and the pricing of federal deposit insurance optimal dynamic regulatory policies for closing ailing banks and for deposit insurance premia are derived as functions of the rate of flow of bank deposits and interest rate on deposits the economy s risk free interest rate and the regulators bank audit administration costs under competitive conditions the threshold assets to deposits ratio below which a bank should be optimally closed is shown to be greater than or equal to one optimal deposit insurance premia and probabilities of bank closure are shown to be nondecreasing in the bank s risk on investment and nonincreasing in the bank s current assets to deposits ratio should regulatory agencies close reorganize an ailing federally insured financial institution if so when the recent record rate of failures of savings and loans associations s ls has renewed the urgency of this question the regulatory agencies are empowered but not required to reorganize financial institutions that are statutorily insolvent i e have zero or negative regulatory net worth recently regulators have in many instances permitted insolvent financial institutions to remain in operation 2 also while debating on the increase of the proposed funding of the federal deposit insurers the u s congress argued whether it would be desirable and if so when to close more s ls thus when regulators should close a troubled financial institution has become a major question of bank regulatory policy while the existing academic literature provides powerful insights into the structure and pricing of the insurers liability this literature offers very little guidance regarding the timing of bank reorganizations 3 indeed to the best of our knowledge the value of the federal

assessing the information content of mark to market accounting with mixed attributes the case of cash flow hedges we examine how outsiders rationally interpret a reported loss on derivatives when the application of mark to market accounting to cash flow hedges creates a mixed attribute problem we find that because of the mixed attribute problem the information content of mark to market accounting is related to the information content of historical cost accounting in a very specific way this relationship allows us to identify the circumstances under which mark to market accounting facilitates and when it detracts from the objective of providing an early warning of potential financial distress we show that the reporting of an impending derivative loss by a distressed firm can actually lead outsiders to infer that the firm is in a better financial position than what they would have inferred under the silence associated with historical cost accounting without the mixed attribute problem mark to market accounting would always yield more accurate assessments of the firm s financial position

volatility in electricity derivative markets the samuelson effect revisited this article proposes an empirical study of the samuelson effect in electricity markets our motivations are twofold first although the literature largely assesses the decreasing pattern in the volatilities along the price curve in commodity markets it has not extensively tested the presence of such a dynamic feature in electricity prices second the analysis of a non storable commodity enriches the literature on the behavior of commodity prices indeed it has been sometimes asserted that the samuelson effect results from the presence of inventories we examine the four most important electricity futures markets worldwide for the period from 2008 to 2014 the german nordic australian and us markets we also use the american crude oil market as a benchmark for a storable commodity negotiated on a mature futures market our analysis has two steps i in addition to the traditional tests we propose and test a new empirical implication of the samuelson effect price shocks should spread from the physical market to the paper market and not the reverse ii based on the concept of indirect storability we investigate the link between the samuelson effect and the storability of the commodity we find evidence of a samuelson effect in all of the electricity markets and show that storage is not a necessary condition for such an effect to appear these results should be taken into account for the understanding of the dynamic behavior of commodity prices for the valuation of electricity assets and for hedging operations

futures markets and production decisions this paper investigates the use of futures prices in making production decisions we derive a preference independent production rule for firms that face both demand and production uncertainty this rule is compared to a simple marginal cost equals future price rule which previously has been suggested for firms with deterministic output data for agricultural producers are used to examine the importance of output uncertainty in the determination of the proper production rule our analysis suggests that for many crops the simple rule is sufficiently accurate to be a useful guide to production

term structures of credit spreads with incomplete accounting information we study the implications of imperfect information for term structures of credit spreads on corporate bonds we suppose that bond investors cannot observe the issuer s assets directly and receive instead only periodic and imperfect accounting reports for a setting in which the assets of the firm are a geometric brownian motion until informed equityholders optimally liquidate we derive the conditional distribution of the assets given accounting data and survivorship contrary to the perfect information case there exists a default arrival intensity process that intensity is calculated in terms of the conditional distribution of assets credit yield spreads are characterized in terms of accounting information generalizations are provided

optimal hedging in a dynamic futures market with a nonnegativity constraint on wealth abstract this paper examines the issue of optimal hedging demands for futures contracts from an investor who cannot freely trade his portfolio of primitive assets in the context of lognormal rather than normal returns and of a constant absolute risk aversion utility function in this context the nonnegativity constraint on wealth is binding and the optimal hedging demands are not identical with those encountered in the bulk of the literature which has largely overlooked this problem negative results concerning the derivation of equilibrium in the futures markets and the computation of the open interests then follow

a theory of competition among pressure groups for political influence this paper presents a theory of competition among pressure groups for political influence political equilibrium depends on the efficiency of each group in producing pressure the effect of additional pressure on their influence the number of persons in different groups and the deadweight cost of taxes and subsidies an increase in deadweight costs discourages pressure by subsidized groups and encourages pressure by taxpayers this analysis unifies the view that governments correct market failures with the view that they favor the politically powerful both are produced by the competition for political favors

income inequality and pollution a reassessment of the environmental kuznets curve abstract improvements in some measures of air and water quality can accompany rising per capita income as illustrated by the so called environmental kuznets curve for pollution variables which show such a relationship we hypothesize that a more equitable distribution of power contributes to these outcomes by enhancing the influence on policy of those who bear the costs of pollution relative to the influence of those who benefit from pollution generating activities an empirical analysis of international variations in seven indicators of air and water quality supports this hypothesis literacy political rights and civil liberties are found to have particularly strong effects on environmental quality in low income countries

expiration and maturity effect empirical evidence from the spanish spot and futures stock index the paper studies how the time remaining to the expiration date of derivative markets affects the volatility of the ibex 35 index expiration effect and its futures market maturity effect the innovation of the study lies in both effects being studied together for the spanish stock market using bivariate ecm garch including dummy variables that express the time left to expiration day the results obtained show that during the week of the expiration day the conditional variance of both markets increases without presenting any significant behaviour in the correlation level during the second week however the conditional variance diminishes and the degree of correlation between both markets increases

us bank credit spreads during the financial crisis this paper argues that first passage time models are likely to better than affine hazard rate models in modelling stressed credit markets and confirms their superior performance in explaining the behavior of credit default swap rates for the major us banking groups over the period of the financial crisis affine models find it hard to deal with periods of exceptionally high or low default risk given their assumption of a constant rate of mean reversion in the hazard rate in contrast first passage time models are specified in terms of the distance to default rather than the hazard rate the persistence of shocks varies with the distance to default allowing the default curve to invert sharply compress when the distance to default is low high i use an empirical version of the collin dufresne et al 2003 model which contains a smoothing parameter that allows it to control the relative effect of these shocks on the short spreads and can be interpreted as an information lag

intertemporal commodity futures hedging and the production decision this paper deals with the producer s optimal use of commodity futures in hedging the framework for analysis is an intertemporal consumption and investment model the producer makes his production decisions at the beginning of the period and realizes his return at the end of the time interval during the period he faces both price and output uncertainties in applying stochastic dynamic programming methods this paper shows the effect of these risks on his consumption behavior further the paper investigates his optimal hedging positions in the futures market over time and his optimal production decisions finally implications of these results on the futures markets are discussed this paper studies a normative model of the farmer s optimal hedging strategy and consumption behavior in a continuous time framework recent papers for example berck 3 rolfo 18 stoll 21 have analyzed the farmer s hedging strategies in a one period context these papers have provided interesting insights into the farmer s production decisions and the optimal design of futures contracts and markets however in a one period model some rather restrictive conditions are imposed on the individual s behavior for example in these models an individual is assumed to ignore any information arrival process as a result the individual is assumed to adjust neither consumption behavior nor hedging positions to the changing state of the world during the production period these conditions can be relaxed in a continuous time framework in an intertemporal context the farmer s hedging problem may be viewed as follows since the farm income at harvest depends on both the spot price and the output in bushels the farmer is subject to both price and output uncertainties during the production period 1 when the farmer can hedge only in the commodity futures market he cannot eliminate both the price and output uncertainties by any hedging strategy 2 as the farm income represents a significant portion of his wealth he must necessarily hold an undiversified portfolio during the production period therefore in essence the farmer must solve for his investment consumption behavior and his hedging strategy facing the nonmarketable asset problem mayers 14 in a multiperiod framework in this context one can see intuitively the major difference between a one

a simple multiperiod minimum risk hedge model a multiperiod hedging model is developed that is simpler than other multiperiod models in the literature the model permits periodic adjustment of the hedge while minimizing the producer s profit variance minimum risk hedge ratios are calculated for steers cows hogs corn and soybeans using the full model with hedge adjustments every two months these ratios are compared to those using the model without periodic hedge adjustments and to a simple single period model the results suggest that simple models may work well for simple hedges while the full model is best for more complex hedging situations such as cross hedges our purpose in this paper is to develop a multiperiod hedging model in which the hedge can be updated each period other multiperiod hedging models e g anderson and danthine karp have substantial data requirements which limit their use as viable hedging tools our aim is to develop a simpler model that will have practical application the model is used to calculate minimum risk hedge ratios for steers cows hogs corn and soybeans and these ratios are compared with hedge ratios based on a multiperiod model in which the hedge cannot be adjusted each period simple minimum risk hedge ratios also are computed for each commodity and compared with the other ratios

investment and hedging under a stochastic yield curve abstract this paper examines portfolio decisions involving both fixed and non fixed income securities two state variables the short term and the long term interest rates fully determine the bonds prices and partly influence the other assets prices we propose first a methodology for determining optimal portfolios in such a context and then use that methodology to solve the portfolio problem of investors whose long term bond holdings are constrained which generates undesirable interest rate risk that are hedged with futures contracts the individual futures positions which involve several hedging components and the futures market equilibrium open interest are derived and analysed

production flexibility stochastic separation hedging and futures prices we study a dynamic model where uncertainty about interim output adjustments causes producers to face price cost and output uncertainty stochastically separable production decisions are independent of the producer s risk preferences and expectations and are based on the prevailing futures price as a certain output price conditions under which futures contracts achieve stochastic separation are established optimal hedging and maturity structure of futures contracts equilibrium futures prices and the effects of futures trading on output are studied the systematic risk premium depends on the product of the futures beta and the covariance of the market return with production revenues article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

theory and measurement of exotic options in u s agricultural support programs theoretical models are derived for pricing derivative market instruments with payoff structures identical to those implied by the deficiency findley and loan programs numerical approximation methods are used to obtain market premiums for the exotic contingent claims embedded in these types of programs the application focuses on a comparison of the value of traditional support programs for corn to that of an exchange put offered under the option pilot program the comparison provides measures of expected cost to the government and of the value of the programs to the producer