target zones and interest rate variability abstract for narrow exchange rate bands and for reasonable parameter values the interest rate differential s asymptotic unconditional variability is increasing in the width of the exchange rate band whereas for wide exchange rate bands it is slowly decreasing in the exchange rate band the interest rate differential s instantaneous conditional variability is decreasing in the width of the exchange rate band a narrow target zone differs from a completely fixed exchange rate regime in that the interest rate differential s instantaneous standard deviation is high and even increases when the zone narrows

short sales are almost instantaneously bad news evidence from the australian stock exchange this paper investigates the market reaction to short sales on an intraday basis in a market setting where short sales are transparent immediately following execution we find a mean reassessment of stock value following short sales of up to 0 20 percent with adverse information impounded within fifteen minutes or twenty trades short sales executed near the end of the financial year and those related to arbitrage and hedging activities are associated with a smaller price reaction trades near information events precipitate larger price reactions the evidence is generally weaker for short sales executed using limit orders relative to market orders this article analyzes the intraday price behavior surrounding short sales executed using market and limit orders within a transparent setting a number of recent studies have focused on daily or monthly stock price behavior surrounding short selling activity in u s markets e g senchack and starks 1993 figlewski and webb 1993 conrad 1994 hanley and seyhun 1994 asquith and meulbroek 1996 and dechow et al 1997 this research has been motivated by the continued interest of market regulators i n short selling activity and the controversy surrounding the desirability restrictions and disclosure requirements related to short selling see janvey 1992 and ramsay 1993 in particular several studies such as that by figlewski and webb 1993 have examined the relationship between short positions and subsequent abnormal returns without finding a strong relationship asquith and meulbroek 1996 in contrast focus on firms with large short positions and find a strong and consistent relationship dechow et al 1997 find a correlation between short selling strategies and strategies based on fundamental analysis these results are consistent with short sellers being able to identify

learning about intervention target zones abstract this paper provides a framework for evaluating how market participants beliefs about foreign exchange target zones change as they learn about central bank intervention policy we generalize the standard target zone model to allow for intra marginal intervention intra marginal intervention implies that market participants beliefs about the target zone can be determined from their beliefs about the likelihood of intervention we then estimate a daily probability of intervention model for the period following the louvre accord we find that the market s views of intervention target zones would have varied quite a bit over time even over this relatively stable period

a spot forward model for electricity prices with regime shifts 2014 elsevier b v all rights reserved this is the authors manuscript preprint to the article

short sale constraints divergence of opinion and asset values evidence from the laboratory the overvaluation hypothesis miller 1977 predicts that a stocks are overvalued when there are short selling restrictions and that b the overvaluation is increasing in the degree of divergence of opinion we design an experiment that allows us to test these predictions in the laboratory our results support the hypothesis that prices are higher in the presence of short selling constraints the overvaluation does not depend on the degree of divergence of opinion

bubbles crashes and endogenous expectations in experimental spot asset markets1 spot asset trading is studied in an environment in which all investors receive the same dividend from a known probability distribution at the end of each of t 15 or 30 trading periods fourteen of twenty two experiments exhibit price bubbles followed by crashes relative to intrinsic dividend value when traders are experienced this reduces but does not eliminate the probability of a bubble the regression of changes in mean price on lagged excess bids number of bids minus the number of offers in the previous period p pt a f b 1 o l supports the hypothesis that a e d the one period expected value of the dividend and that f 0 where excess bids is a surrogate measure of excess demand arising from homegrown capital gains losses expectations thus when bt 1 o goes to zero we have convergence to rational expectations in the sense of fama 1970 that arbitrage becomes unprofitable the observed bubble phenomenon can also be interpreted as a form of temporary myopia tirole 1982 from which agents learn that capital gains expectations are only temporarily sustainable ultimately inducing common expectations or priors tirole 1982 four of twenty six experiments all using experienced subjects yield outcomes that appear to the chart s eye to converge early to rational expectations although even in these cases we get 0 and small price fluctuations of a few cents that invite scalping

macroeconomic stabilization and intervention policy under an exchange rate band abstract macroeconomic stabilization and foreign exchange market interventions are investigated for a small open economy with a nominal exchange rate band in a first best situation a band is not advisable from a stabilization perspective even though with money demand shocks no welfare losses are incurred with goods demand shocks narrowing the band affects the optimal coefficient of intramarginal monetary accommodation with restrictions on intramarginal interventions a band may be desirable in particular with supply shocks and no intramarginal interventions a narrower band is desirable when the central bank attaches a relatively smaller weight to price as opposed to output stability

robust estimation and forecasting of the long term seasonal component of electricity spot prices when building stochastic models for electricity spot prices the problem of uttermost importance is the estimation and consequent forecasting of a component to deal with trends and seasonality in the data while the short term seasonal components daily weekly are more regular and less important for valuation of typical power derivatives the l ong term seasonal components ltsc seasonal annual are much more diffi cult to tackle surprisingly in many academic papers dealing with electricity spot price modeling the importance of the seasonal decomposition is neglected and the problem of forecasting it is not considered with this paper we want to fill the gap and present a thorough study on estimation and forecasting of the ltsc of electricity spot prices we consider a battery of models based on fourier or wavelet decomposition combined with linear or exponential decay we find that all considered wavelet base d models are significantly better in terms of forecasting spot prices up to a year ahead than all considered sine based models this result questions the validity and usefulness of stochastic models of spot electricity prices built on sinusoidal long term seasonal components

the hodrick prescott filter the slutzky effect and the distortionary effect of filters abstract i construct a metric based on optimal filtering for measuring the distortionary effect of business cycle filters the distortionary effect of a filter depends both on the power transfer function of the filter and on the spectrum of the filtered time series the metric is used for two purposes first to determine the optimal value of the smoothing parameter in the hodrick prescott filter hp filter secondly to measure the size of distortions of ten different filters the slutzky effect is a special case of a more general pattern of distortions and it is shown that the alleged slutzky effect of the hp filter is due to an insufficient distinction between the effect of filtering with an ideal high pass filter and the distortionary effect of the hp filter

factor models in the german electricity market stylized facts seasonality and calibration abstract the class of arithmetic factor models is flexible enough to model all stylized facts occurring in electricity markets including negative prices while still yielding tractable derivative prices in this paper we conduct a thorough review of the requirements and possibilities of factor models we compare different seasonality functions and study their power to deseasonalise day ahead spot prices from the epex germany austria market furthermore we introduce an alternative method to estimate mean reversion speed based on arma time series and a method to evaluate the distributional fit of the model to realised market prices which we apply to two non gaussian estimated models

short interest and stock price crash risk abstract using a large sample of u s public firms we find robust evidence that short interest is positively related to one year ahead stock price crash risk the evidence is consistent with the view that short sellers are able to detect bad news hoarding by managers additional findings show that the positive relation between short interest and future crash risk is more salient for firms with weak governance mechanisms excessive risk taking behavior and high information asymmetry between managers and shareholders empirical support is provided showing that the relation between short interest and crash risk is driven by bad news hoarding

hourly electricity prices in day ahead markets this paper focuses on the characteristics of hourly electricity prices in day ahead markets in these markets quotes for day ahead delivery of electricity are submitted simultaneously for all hours in the next day the same information set is used for quoting all hours of the day the dynamics of hourly electricity prices does not behave as a time series process instead these prices should be treated as a panel in which the prices of 24 cross sectional hours vary from day to day this paper introduces a panel model for hourly electricity prices in day ahead markets and examines their characteristics the results show that hourly electricity prices exhibit hourly specific mean reversion and that they oscillate around an hourly specific mean price level furthermore a block structured cross sectional correlation pattern between the hours is apparent

an interpretation of recent research on exchange rate target zones how do exchange rate bands work compared to completely fixed rates between realignments or more precisely what are the dynamics of exchange rates interest rates and central bank interventions within exchange rate bands does the difference between bands and completely fixed exchange rates matter and if so which of the two arrangements is best or more precisely what are the tradeoffs that determine the optimal bandwidth this article will present an interpretation of some selected recent theoretical and empirical research on exchange rate target zones with emphasis on main ideas and results and without technical detail

the price effect of option introduction this paper examines the price effect of option introduction from 1974 to 1980 the introduction of individual options causes a permanent price increase in the underlying security beginning approximately three days before introduction the price effect appears to be associated with introduction and not announcement throughout the sample period excess returns volatility declines with option introduction systematic risk is unchanged there is a positive relation between the price increase and a measure of activity in the options market copyright 1989 by american finance association

international interest rate linkages and the exchange rate regime abstract return differentials between instruments denominated in canadian dollars and instruments denominated in american dollars are investigated the study compares the properties of return differentials in the period of fixed exchange rates during the 1960s and in the period of flexible exchange rates during the 1970s and 1980s both real and nominal return differentials are investigated the results indicate that the change in exchange rate regime is not associated with a change in the average level of ex post return differentials between canada and the united states models which predict ex ante return differentials from available information in a rational expectations framework show a surprisingly large amount of structural stability across the regime change the major impact of the flexible exchange rate regime is on the variance of ex post return differentials and not on the average level of ex post or ex ante return differentials jel e42 e58 g15

the value line enigma extended an examination of the performance of option recommendations the authors extend the research on the value line enigma by examining the performance of call recommendations in value line options d galai s hedge decomposition procedure identifies the components of the calls returns abnormal call returns were most pronounced immediately following the purchase which is consistent with studies of value line s stock rankings the largest and most significant abnormal performance was by calls assigned the highest rank written on stocks judged by value line to be correctly priced abnormal call return performance by joint call and stock ranks was consistent with hypothesis that value line identifies underpriced call options copyright 1993 by university of chicago press

worldwide reach of short selling regulations abstract we characterize legality and incidence of short selling in a worldwide multimarket framework home country short selling restrictions curtail home market stock borrowing by 45 and reduce short selling of the country s american depository receipts adrs by 68 due to regulatory reach also the 2008 us ban on short selling of financial firms reduced borrowing in foreign locations these findings are robust to controls for option availability enforcement returns firm size trading volume dividends adr level volatility days to cover and industry sector further we show that investor conduct resulting from adherence to professional standards is a more powerful mechanism of regulatory reach than intergovernment cooperation

misspecification of capital asset pricing this study documents empirical anomalies which suggest that either the simple one period capital asset pricing model capm is misspecified or that capital markets are inefficient in particular portfolios based on firm size or earnings price e p ratios experience average returns systematically different from those predicted by the capm furthermore the abnormal returns persist for at least two years this persistence reduces the likelihood that these results are being generated by a market inefficiency rather the evidence seems to indicate that the equilibrium pricing model is misspecified however the data also reveals that an e p effect does not emerge after returns are controlled for the firm size effect the firm size effect largely subsumes the e p effect thus while the e p anomaly and value anomaly exist when each variable is considered separately the two anomalies seem to be related to the same set of missing factors and these factors appear to be more closely associated with firm size than e p ratios

efficient modeling and forecasting of electricity spot prices abstract the increasing importance of renewable energy especially solar and wind power has led to new forces in the formation of electricity prices hence this paper introduces an econometric model for the hourly time series of electricity prices of the european power exchange epex which incorporates specific features like renewable energy the model consists of several sophisticated and established approaches and can be regarded as a periodic var tarch with wind power solar power and load as influences on the time series it is able to map the distinct and well known features of electricity prices in germany an efficient iteratively reweighted lasso approach is used for the estimation moreover it is shown that several existing models are outperformed by the procedure developed in this paper

option listing and the stock price response to earnings announcements abstract we examine the effect of option listing on the immediate stock price response to earnings announcements contrary to prior studies using earlier data we find firms initiating option trading after 1986 fail to exhibit a significant decline in earnings response we then examine 420 firms initiating option trading during 1973 1993 in a series of tests controlling for market wide effects and changing firm size we find some evidence that option listing may actually increase the stock price response to earnings but no evidence listing reduces the response both longitudinal and cross sectional tests produce similar results

earnings announcements stock price adjustment and the existence of option markets this paper employs a new approach to study the effects of option trading on the behavior of underlying stock prices extant research compares distributional properties of the stock price at two points in time divided by an event in the option market that might affect price behavior as an alternative we examine the stock price adjustment to the release of quarterly earnings using samples of firms with and without listed options we find the two samples exhibit different adjustment processes with the nonoption firms requiring substantially more time to adjust since the advent of organized stock option trading the investment community

options resilience during extreme volatility evidence from the market events of may 2010 abstract using intraday trades and quotes data we study the stock options market before during and after the market events of may 6 2010 focusing on the s p 500 and s p 100 stock options we explore if the options market provided any discernible signals that forewarned the extreme volatility on that day and whether the recovery was fast and without a permanent impact we find that the options market reacted to the volatility rather than predicting it and almost all of the variables are indistinguishable from their previous levels in the next few trading days intraday empirical analysis suggests that most of the impact was over within a few hours from the peak of market volatility

a note on using the hodrick prescott filter in electricity markets abstract recently nowotarski et al 2013 have found that wavelet based models for the long term seasonal component ltsc are not only better in extracting the ltsc from a series of spot electricity prices but also significantly more accurate in terms of forecasting these prices up to a year ahead than the commonly used monthly dummies and sine based models however a clear disadvantage of the wavelet based approach is the increased complexity of the technique as compared to the other two classes of ltsc models and the resulting need for dedicated numerical software which may not be readily available to practitioners in their work environments to facilitate this problem we propose here a much simpler yet equally powerful method for identifying the ltsc in electricity spot price series it makes use of the hodrick prescott hp filter a widely recognized tool in macroeconomics

short sale constraints information acquisition and asset prices abstract during financial crises financial market regulators often restrict short selling to support prices and curb volatility however evidence suggests that short selling bans during the turmoil in financial markets in 2007 2009 failed to achieve regulators goals we analyze a model of costly private information acquisition and asset pricing under short sale constraints to examine a possible cause of this failure we show that the constraints increase return volatility by adversely affecting the production of private information when investors are highly risk averse or are holding highly correlated risky assets the distortion in private information production arising from imposing short sale constraints leads to undervaluation implying that imposing short selling bans during economic crises not only fails to curb volatility but also may fail to support prices

an analysis of the implications for stock and futures price volatility of program trading and dynamic hedging strategies the notion that a real security is redundant when it can be synthesized by a dynamic trading strategy ignores the informati onal role of real securities markets portfolio insurance uses a dyna mic strategy to synthesize a european put the absence of trading in an appropriate real put option prevents the transmittal of informatio n to market participants about the future price volatility associated with current dynamic hedging strategies less information is transmi tted to potential liquidity providers it will therefore be more di fficult for the market to absorb the trades implied by the dynamic he dging strategies and the stocks future price volatility will rise copyright 1988 by the university of chicago

the information content of short interest a natural experiment an increase in the cost of selling short should increase the bearish information content of short interest announcements by driving relatively uninformed short sellers out of the market we extend the diamond and verrecchia 1987 model to include short selling against the box and test the extended model using a natural experiment based around the taxpayer relief act of 1997 tra97 tra97 made short selling more costly for those shorting against the box consistent with the implications of our extended model this increase in short selling costs strengthens the negative relationship between short interest and subsequent stock price performance post tra97

the linkage between speculative attack and target zone models of exchange rates in this paper we generalize the target zone exchange rate as model formalized by krugman 1988b to include finite sized interventions in defense of the zone the main contributions of these pages consist of linking the recent developments in the theory of target zones to the mirror image theory of speculative attacks on asset price fixing regimes and in using aspects of that linkage to give an intuitive interpretation to the smooth pasting condition usually invoked as a terminal condition this abstract was borrowed from another version of this item

short selling constraints as cause for price distortions an experimental study in this paper we explore the influence of the possibility to short stocks and or borrow money in laboratory markets a key innovation of our study is that subjects can simultaneously trade two risky assets on two double auction markets allowing us to differentiate between assets with relatively high versus low capitalization divergence of opinions is created by providing each trader with noisy information on the intrinsic values of both assets we find that when borrowing money or shorting stocks is restricted prices are systematically distorted specifically stocks with high low capitalization are traded at lower higher prices than their fundamental value lifting the restrictions leads to more efficient prices and more liquidity thereby also lowering volatility and bid ask spreads

weekly self scheduling forward contracting and pool involvement for an electricity producer an adaptive robust optimization approach abstract this paper addresses the optimization under uncertainty of the self scheduling forward contracting and pool involvement of an electricity producer operating a mixed power generation station which combines thermal hydro and wind sources and uses a two stage adaptive robust optimization approach in this problem the wind power production and the electricity pool price are considered to be uncertain and are described by uncertainty convex sets to solve this problem two variants of a constraint generation algorithm are proposed and their application and characteristics discussed both algorithms are used to solve two case studies based on two producers each operating equivalent generation units differing only in the thermal units characteristics their market strategies are investigated for three different scenarios corresponding to as many instances of electricity price forecasts the effect of the producers approach whether conservative or more risk prone is also investigated by solving each instance for multiple values of the so called budget parameter it was possible to conclude that this parameter influences markedly the producers strategy in terms of scheduling profit forward contracting and pool involvement these findings are presented and analyzed in detail and an attempted rationale is proposed to explain the less intuitive outcomes regarding the computational results these show that for some instances the two variants of the algorithms have a similar performance while for a particular subset of them one variant has a clear superiority

a new measure of cross sectional risk and its empirical implications for portfolio risk management abstract litterman et al litterman r scheinkman j weiss l 1991 volatility and the yield curve journal of fixed income 1 june 49 53 and engle and ng engle r f ng v k 1993 time varying volatility and the dynamic behavior of the term structure journal of money credit and banking 25 3 336 349 provide empirical evidence of a relation between yield curve shape and volatility this study offers theoretical support for that finding in the general context of cross sectional time series we introduce a new risk measure quantifying the link between cross sectional shape and market risk a simple econometric procedure allows us to represent the risk experienced by cross sections over a time period in terms of independent factors reproducing possible cross sectional deformations we compare our risk measure to the traditional cross yield covariance according to their relative performance empirical investigation in the us interest rate market shows that 1 cross shape risk factors outperform cross yield risk factors i e yield curve level slope and convexity in explaining the market risk of yield curve dynamics 2 hedging multiple liabilities against cross shape risk delivers superior trading strategies compared to those stemming from cross yield risk management

short sales constraints and price discovery evidence from the hong kong market short sales practices in the hong kong stock market are unique in that only stocks on a list of designated securities can be sold short by analyzing the price effects following the addition of individual stocks to the list we find that short sales constraints tend to cause stock overvaluation and that the overvaluation effect is more dramatic for individual stocks for which wider dispersion of investor opinions exists these findings are consistent with miller s 1977 intuition and other optimism models we also document higher volatility and less positive skewness of individual stock returns when short sales are allowed the question of how short sales impact capital markets is highly controversial with short sale regulations varying widely across countries and capital markets 1 although short selling has been carried out for years in major financial markets around the world its effects on market efficiency especially on pricing efficiency remain of interest to financial researchers miller 1977 theorizes that in the presence of short sales constraints security prices tend to reflect a more optimistic valuation than the average opinion of potential investors and thus tend to be upward biased this overvaluation argument is based on two conditions 1 a security s short sales are either prohibited or costly and 2 investors have heterogeneous beliefs or information about the security s value the underlying intuition is quite straightforward pessimistic investors are forced to sit out of the market when short sales are not available and thus some negative information is not reflected in prices enabling enthusiastic buyers to bid prices above the level that average investors perceive as fair this argument has significant implications for market efficiency theories since one of the major functions of capital markets is price discovery indeed an efficient market should be a market in which prices always

the effect of short selling on bubbles and crashes in experimental spot asset markets a series of experiments illustrate that relaxing short selling constraints lowers prices in experimental asset markets but does not induce prices to track fundamentals we argue that prices in experimental asset markets are influenced by restrictions on short selling capacity and limits on the cash available for purchases restrictions on short sales in the form of cash reserve requirements and quantity limits on short positions behave in a similar manner a simulation model based on delong et al 1990 generates average price patterns that are similar to the observed data asset market bubbles are persistent deviations of prices from fundamentals to the extent that bubbles exist they can influence investment levels and the allocation of capital and thereby have considerable economic effects in recognition of their potential importance the question of the existence and pervasiveness of bubbles has been a focus of extensive empirical investigation see e g shiller 1981 blanchard and watson 1982 diba and grossman 1988 and west 1988 these studies yield mixed results regarding the empirical relevance of bubble phenomena one source of the differences in conclusions may be that because the fundamental value of the assets cannot be observed tests of the presence of bubbles are joint tests with the particular specification of the process guiding the evolution of fundamentals also being tested the availability of short selling is widely believed to make bubble formation less likely one rationale for such a belief is the notion that the cause of asset market bubbles is a constraint on the ability of traders to speculate on future downward price movements see e g miller 1977 jarrow 1980 diamond and verrecchia 1987 or figlewski and webb 1993 in the absence of short sales traders may sell only the shares in their portfolios the availability of short sales relaxes this constraint in this paper we study empirically the effect of allowing short sales on both the incidence and magnitude of market bubbles we choose a setting in which the fundamental value of the asset is clearly and unambiguously defined and known at all times and bubbles typically occur namely we use the experimental environment that smith suchanek and williams 1988 introduce while

playing with the band dynamic effects of target zones in an open economy this paper applies techniques of regulated brownian motion to a model of a small open economy to investigate how bands on fundamental driving variables affect the realization of the nominal exchange rate the real exchange rate prices and output the author shows that these bands mitigate the relationship between exogenous fundamentals and endogenous variables through their effects on expectations he also considers the effects of changing the width of the band and finds greater stabilization of endogenous variables with more narrow bands on exogenous fundamentals copyright 1990 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

pricing german energiewende products intraday cap floor futures abstract in this paper we introduce a model for the pricing of german intraday cap floor futures introduced by the eex in 2015 we give a thorough overview of the german intraday market and in particular introduce the id3 price index which is the underlying for intraday cap floor futures to price these derivatives we propose a hull white model from interest rate theory with seasonality from futures prices we apply our theoretical results to market data and conduct an empirical analysis involving the initial fit and empirical distribution of intraday cap futures prices

efficiency and the bear short sales and markets around the world we analyze cross sectional and time series information from 46 equity markets around the world to consider whether short sales restrictions affect the efficiency of the market and the distributional characteristics of returns to individual stocks and market indices we find some evidence that prices incorporate negative information faster in countries where short sales are allowed and practiced a common conjecture by regulators is that short sales restrictions can reduce the relative severity of a market panic we find strong evidence that in markets where short selling is either prohibited or not practiced market returns display significantly less negative skewness

short sales and speed of price adjustment evidence from the hong kong stock market abstract we present empirical evidence that short sales contribute to market efficiency by increasing the speed of price adjustment to not only private public firm specific information but also market wide information shortable stocks are characterized by weaker trade continuity and stronger quote reversals they adjust faster to new information than non shortable counterparts these findings remain robust even in an up market condition in which short sales are not binding the amount of information incorporated in each trade is also significantly higher for shortable than non shortable stocks in both up and down market conditions after controlling for firm size trading volume liquidity price and option trading short sales stand out as one of the significant factors that speed up the price adjustment

monetary and real shocks and the optimal target zone abstract an exchange rate target zone is analysed in a model where the economy is disturbed by shocks to money demand and goods demand the stabilising properties of a target zone are compared to those of fixed and flexible exchange rate regimes it is found that a target zone offers a compromise between these two extremes it is also shown that when there are shocks to both money and goods demand a target zone is better than either a fixed rate or a floating rate in the sense that it minimises the variance of output and prices

monetary contracting between central banks and the design of sustainable exchange rate zones abstract an exchange rate system is a contract which commits central banks to intervene in the foreign exchange market the design features of the system include the rules of intervention the limits placed on exchange rates and the crisis scenario describing possible transitions to new regimes this paper considers the various trade offs one faces in designing an exchange rate system one of these pertains to the amount of reserves which the central banks must have on hand in order to forestall a speculative attack and make the system sustainable the amount of reserves needed depends crucially on the assumed crisis scenario

electricity futures price models calibration and forecasting a new one factor model with a random volatility parameter is presented in this paper for pricing of electricity futures contracts it is shown that the model is more tractable than multi factor jump diffusion models and yields an approximate closed form pricing formula for the electricity futures prices on real market data it is shown that the performance of the new model compares favourably with two existing models in the literature viz a two factor jump diffusion model and its jump free version i e a two factor linear gaussian model in terms of ability to predict one day ahead futures prices further a multi stage procedure is suggested and implemented for calibration of the two factor jump diffusion model which alleviates the difficulty in calibration due to a large number of parameters and pricing formulae which involve numerical evaluation of integrals we demonstrate the utility of our new model as well as the utility of the calibration procedure for the existing two factor jump diffusion model by model calibration and price forecasting experiments on three different futures price data sets from nord pool electricity data for the jump diffusion model we also investigate empirically whether it performs better in terms of futures price prediction than a corresponding jump free linear gaussian model finally we investigate whether an explicit calibration of jump risk premium in the jump diffusion model adds value to the quality of futures price prediction our experiments do not yield any evidence that modelling jumps leads to a better price prediction in electricity markets

in accuracy of a european political stock market the influence of common value structures this paper presents the results of a political stock market in the netherlands pam94 the exchange covered three consecutive elections allowing trade on five different markets the predictions at pam94 appear to be less accurate than those of previous markets of comparable size of the possible explanations that we examine one in particular survives closer scrutiny it concerns a type of judgement failure related to the winner s curse in common value auctions theoretical as well as empirical support is offered apart from qualifying the attractiveness of such markets as an alternative for opinion polls this explanation may also be relevant for the analysis of other asset markets moreover this judgement failure may be more important for european political stock markets than for the u s because the structure of the common values vote shares at multiparty elections make them especially vulnerable to it

the informational effects of restrictions on short sales some empirical evidence in a world of heterogeneous investors a competitive financial market has two major functions first it is the mechanism by which ownership of the existing supply of risky assets is distributed among investors this is the role which is analyzed in detail by the standard capital asset pricing model capm and its many extensions the second important market function is to aggregate the diverse information held by different investors into a single price most versions of the capm eliminate the information aggregation function by assuming that investors hold homogeneous beliefs with respect to the probability distribution of asset returns exceptions which deal with some aspects of the problem are lintner 7 grossman 4 grossman and stiglitz 5 and figlewski 1 3

short interest explanations and tests cross sectional and time series tests are performed to explain levels and changes in short interest explanatory variables and tests are chosen based on tax arbitrage and speculative reasons for going short short interest is found to follow a seasonal pattern that is weakly consistent with tax based trading stocks with high betas and the existence of convertible securities or options tend to have higher levels of short interest which is con sistent with arbitrage efforts for firms with traded options there is a positive association between the month to month changes in option open interest and short interest prior months returns and changes in short interest are positively related but there is no rela tionship between changes in short interest and returns in the subsequent month

margin short selling and lotteries in experimental asset markets the robustness of bubbles and crashes in markets for assets with finite lives is perplexing this paper reports the results of experimental asset markets in which participants trade two assets in some markets price bubbles form in these markets traders pay higher prices for the asset with lottery characteristics i e a claim on a large unlikely payoff however institutional design has a significant impact on deviations in prices from fundamental values particularly for an asset with lottery characteristics price run ups and crashes are moderated when traders finance purchases of the assets themselves and are allowed to short sell

slow diffusion of information and price momentum in stocks evidence from options markets this paper investigates the source of price momentum in the stock market using information from options markets we provide direct evidence of the gradual information diffusion model in hong and stein 1999 momentum profits are larger for stocks whose information diffuses slowly into the stock market we exploit the options markets to identify stocks with slow information diffusion speed as informed traders trade options to realize the information that has not been fully incorporated in the stock price we are able to enhance the momentum strategy by selecting winner loser stocks with high growth large drop in call option implied volatility our empirical strategy generates a risk adjusted alpha of 1 8 per month over the 1996 2011 period during which the simple momentum strategy fails to perform the results are robust to the impact of earnings announcement transaction costs industry concentration and choice of options moneyness and time to maturity finally our finding is not driven by existing stock or option related characteristics that are known to improve momentum

information trade and derivative securities hellwig s 1980 model is used to analyze the value of improving trading opportunities by more frequent trading in the underlying asset or by trading in a derivative asset with multiple trading sessions uninformed investors behave as rational trend followers while more informed investors follow a contrarian strategy as trading becomes continuous pareto efficiency is achieved with trading in an appropriate derivative security pareto efficiency may be achieved in only a single round of trading all derivative claims are then priced on black and scholes 1973 principles and in the absence of further supply shocks no trading will take place in subsequent trading rounds article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

congestion management rules and trading strategies in the spanish electricity market abstract this paper analyses the economic incentives embodied in the rules governing the resolution of transmission constraints in the spanish wholesale electricity market and the way these incentives may have influenced on the trading behaviour of both the generators and the demand side the evidence obtained is consistent with them responding to these incentives in particular buyers would respond to the way congestion costs are billed to them by abandoning the daily market in favour of the intraday market as far as possible additionally some strategic generators may have been prompted the system operator to require them to inject electricity into the system to solve network congestions finally these results may contribute to shed light on what should be expected of the reform in the aforementioned rules

options short sale constraints and market efficiency a new perspective this paper undertakes a new investigation of the potential for options to mitigate short sale constraints i find that option introduction alleviates 79 of the price adjustment efficiency disparity between short sale constrained and unconstrained stocks in relation to negative news no significant improvement in adjustment efficiency is found in response to positive information these results are robust to controls for endogeneity biases associated with the option introduction selection process further i find evidence that post option improvement in efficiency is similar in relation to private and public information this suggests that short sale constraint effects stem at least in part from an irrational optimism bias or another behavioral source as suggested theoretically by miller 1977 collectively these results suggest that options act as an effective substitute to short sales significantly contributing to the informational efficiency of the market

big effects of small interventions the informational role of intervention in exchange rate policy abstract in this paper we demonstrate how an infintesimal unsterilized foreign exchange intervention may cause a very large discrete change in the exchange rate we analyze an example in which there is a target zone policy in place but the actual width of the target zone is not known by participants in the foreign exchange market in this case intervention both affects fundamentals and conveys information about policy the exchange rate jumps in response to intervention with the size of the jump related to the uncertainty about the true band width also in this model the relationship between the exchange rate and the fundamental depends upon both the history of the path of the exchange rate and whether or not intervention has occured

reassessing the impact of option introductions on market quality a less restrictive test for event date effects prior research concludes that option introductions improve the average liquidity of the underlying stocks we develop an improved generalizable test to assess whether market quality changes occur on or near an event date applying this method to option listing events we conclude that options do not systematically improve the market quality of the underlying security rather the market quality of the underlying security improves before the listing decision hazard model tests indicate that improving liquidity is a selection criterion in the option listing decision moreover these tests suggest that the size of a stock s bid ask spread is the single most important option listing determinant this study reexamines the impact of equity option introductions on stock market liquidity previous studies find an improvement in market quality charac teristics after option introductions and conclude that options improve the quality of the underlying market 1 in this paper we make several new contributions first we present and adopt a more flexible empirical tool for identifying regime shifts when event selection may be endogenously determined second using this method we reverse two major findings of the existing literature that option in troductions reduce spreads and increase volume finally we find that the bid ask spread is an important and perhaps the most important determinant of the option

electricity forward curves with thin granularity theory and empirical evidence in the hourly epexspot market we propose a constructive definition of electricity forward price curve with cross sectional timescales featuring hourly frequency on the curve is jointly consistent with both risk neutral market information represented by baseload and peakload futures quotes and historical market information as mirrored by periodical patterns exhibited by the time series of day ahead prices from a methodological standpoint we combine nonparametric filtering with monotone convex interpolation such that the resulting forward curve is pathwise smooth and monotonic cross sectionally stable and time local from an empirical standpoint we exhibit these features in the context of epex spot and eex derivative markets we perform a backtesting analysis to assess the relative quality of our forward curve estimate compared to the benchmark market model of benth koekebakker and ollmar 2007

constructing forward price curves in electricity markets we present and analyze a method for constructing approximated high resolution forward price curves in electricity markets because a limited number of forward or futures contracts are traded in the market only a limited picture of the theoretical continuous forward price curve is available to the analyst our method combines the information contained in observed bid and ask prices with information from the forecasts generated by bottom up models as an example we use information concerning the shape of the seasonal variation from a bottom up model to improve the forward price curve quoted on the nordic power exchange

options short sales and market completeness this paper presents empirical evidence that trading in options contributes to both transactional and informational efficiency of the stock market by reducing the effect of constraints on short sales the significantly higher average level of short interest exhibited by optionable stocks supports the argument that options facilitate short selling we also find significant effects on option prices related to the short interest in the underlying stock we then present evidence that options also increase information efficiency earlier work that is replicated and extended here has suggested that short sale constraints cause stock prices to underweight negative information options appear to reduce that effect

a review of bubbles and crashes in experimental asset markets this paper discusses the literature on bubbles and crashes in the most commonly used experimental asset market design introduced by smith et al it documents the main findings based on the results from 41 published papers 3 book chapters and 20 working papers

fundamentals uncertainty bubbles and exchange rate dynamics abstract using a monetary model of exchange rate determination we study exchange rate dynamics with bubbles which depend on stochastic market fundamentals these dynamics can be either stochastically stable or unstable and either monotonic or non monotonic including cyclic in an extreme case they converge with probability one and exhibit cyclic movements implications for the analysis of time dependent regime shifts are also explored exchange rates with bubbles are likely to appear less volatile than the fundamentals in finite samples both the variance bounds and cointegration tests might thus be ineffective in testing the absence of bubbles under fundamentals uncertainty

the term structure of interest rate differentials in a target zone theory and swedish data abstract the term structure of interest rate differentials is derived in a model of a small open economy with a target zone exchange rate regime for given time to maturity the interest rate differential is decreasing in the exchange rate and for given exchange rate the interest rate differential s absolute value and its instantaneous variability are both decreasing in the time to maturity devaluation realignment risks are incorporated and imply upward shifts of the interest rate differentials several implications of the theory are found to be broadly consistent with data on swedish exchange rates and interest differentials for the period 1986 1989