the economics of a blend mandate for biofuels a biofuel blend mandate may increase or decrease consumer fuel prices with endogenous oil prices depending on relative supply elasticities biofuel tax credits always reduce fuel prices tax credits result in lower fuel prices than under a mandate for the same level of biofuel production if tax credits are implemented alongside mandates then tax credits subsidize fuel consumption instead of biofuels this contradicts energy policy goals by increasing oil dependency co 2 emissions and traffic congestion while providing little benefit to either corn or ethanol producers these social costs will be substantial with tax credits costing taxpayers 28 7 billion annually by 2022 copyright 2008 oxford university press

bulls bears and market sheep abstract a deterministic excess demand model of stock market behavior is presented that generates stochastically fluctuating prices and randomly switching bear and bull markets

garch inadequacy for modelling exchange rates empirical evidence from latin america this article checks for the adequacy of using garch models in exchange rate series using the hinich portmanteau bicorrelation test we find that a garch formulation or any of its variants fails to capture the data generating process of the main latin american exchange rates our results highlight the potential of having misleading public policy when estimates are based in garch types of models this article also complements recent similar findings encountered in european and asian economies

chaos in oil prices evidence from futures markets abstract we test for the presence of low dimensional chaotic structure in crude oil heating oil and unleaded gasoline futures prices from the early 1980s evidence on chaos will have important implications for regulators and short term trading strategies while we find strong evidence of non linear dependencies the evidence is not consistent with chaos our test results indicate that arch type processes with controls for seasonal variation in prices generally explain the non linearities in the data we also demonstrate that employing seasonally adjusted price series contributes to obtaining robust results via the existing tests for chaotic structure maximum likelihood methodologies that are robust to the non linear dynamics lend support for samuelson s hypothesis on contract maturity effects in futures price changes however the tests for chaos are not found to be sensitive to the maturity effects in the futures contracts the results are robust to controls for the oil shocks of 1986 and 1991

uncovering nonlinear structure in real time stock market indexes the s p 500 the dax the nikkei 225 and the ftse 100 this article tests for nonlinear dependence and chaos in real time returns on the world s four most important stock market indexes both the brock dechert scheinkman and the lee white and granger neural network based tests indicate persistent nonlinear structure in the series estimates of the lyapunov exponents using the nychka ellner gallant and mccaffrey neural net method and the zeng pielke and eyckholt nearest neighbor algorithm confirm the presence of nonlinear dependence in the returns on all indexes but provide no evidence of low dimensional chaotic processes given the sensitivity of the results to the estimation parameters we conclude that the data are dominated by a stochastic component

flexibility as a source of value in the production of alternative fuels the ethanol case there is typically a high degree of flexibility associated with the production of alternative fuels due to the ability to source from different input raw materials or to produce different output products based on market conditions in this paper we consider the particular example of ethanol and seek to quantify the incremental value from flexibility in its production from sugarcane in brazil we accomplish this by first jointly modeling the stochastic processes for the prices of the two relevant commodities sugar a food commodity and ethanol an energy commodity in discrete time as a bivariate lattice this framework allows us to value the option to switch output products based on the respective price signals of the two commodities however unlike the usual assumption of geometric brownian motion stochastic processes we use the more realistic case of mean reverting commodity price processes we estimate the parameters for these processes by applying a regression based procedure to empirical sugar and ethanol data collected during a period from 1998 through 2008 our results show that the option to switch outputs has significant value even under the assumption of mean reverting prices which has implications for both producers and policy makers alike

testing for nonlinear dependence in daily foreign exchange rates the purpose of this article is to investigate whether daily changes in five major foreign exchange rates contain any nonlinearities although the data contain no linear correlation evidence indicates the presence of substantial nonlinearity in a multiplicative rather than additive form further examination reveals that a generalized autoregressive conditional heteroskedasticity model can explain a large part of the nonlinearities for all five exchange rates copyright 1989 by the university of chicago

gasoline price volatility and the elasticity of demand for gasoline abstract we examine how gasoline price volatility impacts consumers price elasticity of demand for gasoline results show that volatility in prices decreases consumer demand for gasoline in the intermediate run we also find that consumers appear to be less elastic in response to changes in gasoline price when gasoline price volatility is medium or high compared to when it is low moreover we find that when we control for variance in our econometric model gasoline price elasticity of demand is lower in magnitude in the long run

real options analysis of investment in solar vs wind energy diversification strategies under uncertain prices and costs in this paper we study a community or firm considering to diversify its investment in two distinct renewable energy technologies namely wind and solar pv electricity we assume technological learning curves as a function of cumulative capital investment a real options approach is applied as it takes into account uncertainty about prices and learning as well as irreversibility associated with investment decisions we investigate three different cases dealing with uncertainty about future electricity prices and uncertainty about the speed with which learning drives the costs of wind and solar electricity down we assess the minimum threshold for the stochastic price and the maximum electricity production cost that makes it optimal for the firm to invest in the two technologies the results show that the learning rate affects the option to invest in but reducing critical threshold for exercising it the greater the amount of capital invested the more learning stimulates earlier exercising of the option to invest the firm will then anticipate the option to invest and exercise it for lower critical threshold values if all capital is invested in one technology if capital investment is diversified the option should be exercised at a higher critical threshold more uncertainty in energy prices or technology costs postpones the option to invest although investing in both solar and wind may be profitable under particular conditions of price and cost uncertainty the theoretically optimal strategy is generally investing in only one technology that is solar or wind depending on their relative initial costs and learning rates this suggests that the practice in most countries of diversifying renewable energy may reflect a mistaken strategy

nonlinear monetary dynamics this article uses the correlation dimension technique along with the residual and shuffle tests to look for evidence of nonlinear dynamic structure in various weekly monetary aggregates their components the monetary base and the money multipliers the results support the barnett and chen 1988 and chen 1988 findings of nonlinearity in divisia m2 divisia m3 and simple sum m2 evidence of nonlinear structure is also found for simple sum m1 currency demand deposits all checkable deposits m3 minus m2 the monetary base and the multipliers of m1 m2 and m3

episodic nonlinearity and nonstationarity in alberta s power and natural gas markets abstract this paper uses a new method of testing for linear and nonlinear lead lag relationships between time series introduced by brooks and hinich brooks c and hinich m j cross correlations and cross bicorrelations in sterling exchange rates journal of empirical finance 20 1999 385 404 on alberta s natural gas and power markets the test based on the concepts of cross correlation and cross bicorrelation is used after pre whitening of the data to test for the existence of residual nonlinearity as well as the episodic nature of the nonlinearity our evidence points to a relatively rare episodic nonlinearity within and across the two series having important implications for forecasting these series

labor market effects of women s post school age training using data from the 1984 nls mature women s cohort this study investigates whether post school age training defined as both formal education and other forms of training received after the end of formal schooling affected women s wages and labor force participation the author analyzes the association between training and wage changes over the years 1967 when the women in the sample ranged in age from 30 to 44 through 1984 when they had reached ages 47 to 61 and compares labor force participation in 1984 between women who had obtained post school age training and those who had not women who received post school age training experienced a greater rise in wages and participated in the labor force at older ages than did women who received no training

distinguishing between stochastic and deterministic behavior in foreign exchange rate returns further evidence abstract the nature of non linear dependence in hourly exchange rate returns is scrutinized while the brock dechert and scheinkman bds test results reject i i d behavior various correlation dimension estimates reveal little evidence in favor of a low dimensional attractor in the time series

blending under uncertainty real options analysis of ethanol plants and biofuels mandates abstract the value of a representative ethanol producer that benefits from both low and high gasoline prices in the short run is modeled ethanol producers make a modest competitive profit in the mandate induced region of production a low price of gasoline increases the demand for blend ethanol and consequently increases the profit of ethanol producers on the other hand when gasoline becomes costlier than ethanol the capacity constraints of the biofuels sector bind and ethanol producers gain large quasi monopoly margins this is an interesting example of a market where two commodities are complement up to a point and then substitute after that we postulate the value of an ethanol producer as a strangle option consisting of two real options the option to substitute gasoline at times of expensive crude oil and the option to expand supply of blend at times of cheap gasoline using a dynamic model we show that the higher volatilities of crude oil and ethanol costs increase biofuels firms value we also find non monotonic relationships between the value of an ethanol plant and several underlying variables including gasoline price level we estimate the value provided by a 10 blend mandate to be around 150 000 000 for a representative ethanol unit our results offer a novel view of oil and feedstock price risks in contrast to the common belief that considers those risks as a negative factor for the biofuels sector

complexity and the character of stock returns empirical evidence and a model of asset prices based on complex investor learning empirical evidence on the distributional characteristics of common stock returns indicates 1 a power law tail index close to three describes the behavior of the positive tail of the survivor function of returns pr r x x a reflection of fat tails 2 general linear and nonlinear dependencies exist in the time series of returns 3 the time series return process is characterized by short run dependence short memory in both returns as well as their volatility the latter usually characterized in the form of autoregressive conditional heteroskedasticity and 4 the time series return process probably does not exhibit long memory but the squared returns process does exhibit long memory we propose a model of complex self referential learning and reasoning amongst economic agents that jointly produces security returns consistent with these general observed facts and which are supported here by empirical results presented for a benchmark sample of 50 stocks traded on the new york stock exchange the market we postulate is populated by traders who reason inductively while compressing information into a few fuzzy notions that they can in turn process and analyze with fuzzy logic we analyze the implications of such behavior for the returns on risky securities within the context of an artificial stock market model dynamic simulation experiments of the market are conducted from which market clearing prices emerge allowing us to then compute realized returns we test the effects of varying values of the parameters of the model on the character of the simulated returns the results indicate that the model proposed in this paper can jointly account for the presence of a power law characterization of the positive tail of the survivor function of returns with exponent on the order of three for autoregressive conditional heteroskedasticity for long memory in volatility and for general nonlinear dependencies in returns

tick size the compass rose and market nanostructure abstract economists have begun using methods borrowed from the physical sciences to search for non linearities in economic and financial data the so called phase portrait from chaos theory in which the values of a time series are plotted against their delayed values is one of the techniques employed for this purpose it has recently been shown however that when returns on traded assets are plotted in this manner in two or three dimensional space surprising patterns arise which seriously distort the conclusions that can be drawn about the underlying data these patterns which resemble a compass rose reflect the microstructure of the market or more specifically the finite size of the ticks by which prices can change in a market the present paper clarifies the reason for this phenomenon it is shown that within the microstructure there exists nanostructure that becomes visible only when the computations are performed without approximation high frequency data from a foreign exchange market are used to illustrate this phenomenon

nonparametric modeling of carbon prices this paper constitutes the first exercise of nonparametric modeling applied to carbon markets the framework of analysis is carefully detailed and the empirical application unfolds in the case of bluenext spot and ecx futures prices the data is gathered in daily frequency from april 2005 to april 2010 first we document the presence of strong nonlinearities in the conditional mean functions second the conditional volatility functions reveal an asymmetric and heteroskedastic behavior which is dramatically different between carbon spot and futures logreturns the results for spot prices are also robust to subsamples decomposition third we show in an out of sample forecasting exercise that nonparametric modeling allows reducing the prediction error by almost 15 compared to linear ar models this latter result is confirmed by the diebold mariano pairwise test statistic

estimating the supply and demand of gasoline using tax data abstract we estimate supply and demand functions for the u s gasoline market using information from excise tax returns provided by the irs for the period 1990 2009 we find price and income elasticities of demand similar to those found using eia data we find a price elasticity of supply of 0 29 which differs from the common assumption of a perfectly inelastic short run supply curve by using a novel data source the analysis provides a robustness check of aggregate studies of gasoline demand and a consistent econometric estimate of the price elasticity of gasoline supply the results are useful in guiding tax and regulatory policies regarding gasoline consumption

testing for non linear structure in an artificial financial market abstract we present a stochastic simulation model of a prototype financial market our market is populated by both noise traders and fundamentalist speculators the dynamics covers switches in the prevailing mood among noise traders optimistic or pessimistic as well as switches of agents between the noise trader and fundamentalist group in response to observed differences in profits the particular behavioral variant adopted by an agent also determines his decision to enter on the long or short side of the market short run imbalances between demand and supply lead to price adjustments by a market maker or auctioneer in the usual walrasian manner our interest in this paper is in exploring the behavior of the model when testing for the presence of chaos or non linearity in the simulated data as it turns out attempts to determine the fractal dimension of the underlying process give unsatisfactory results in that we experience a lack of convergence of the estimate explicit tests for non linearity and dependence the bds and kaplan tests also give very unstable results in that both acceptance and strong rejection of iidness can be found in different realizations of our model all in all this behavior is very similar to experience collected with empirical data and our results may point towards an explanation of why robustness of inference in this area is low however when testing for dependence in second moments and estimating garch models the results appear much more robust and the chosen garch specification closely resembles the typical outcome of empirical studies

a class of nonlinear arch models a class of nonlinear arch models is suggested the proposed class encompasses several functional forms for arch which have been put forth in the literature a lagrange multiplier test is developed to test engle s arch specification against the wider class of models this test provides an easily computed diagnostic check of the adequacy of an arch model after it has been estimated the theory is applied to a number of weekly exchange rate series and we find strong evidence of nonlinear arch

work history and later life labor force participation evidence from a large telecommunications firm this study examines the relationship between later life labor force participation and work history survey data on 1 805 bell canada early retirees show that 40 returned to work of whom 17 took full time employment 51 took part time employment and 32 became self employed return to work was positively related to work attachment and tenure in the last job and negatively related to having been in a non managerial occupation and lacking upward career mobility those with high attachment to work as measured by responses to several survey questions were more likely to return to full time employment than to retire clerical workers were less likely than managers to choose part time employment over retirement both lateral versus upward mobility in the last job and high work attachment were negatively related to the choice of self employment over retirement

the joint choice of retirement age and postretirement hours of work in this paper we develop and estimate the first complete and internally consistent model of the effect of social security on the labor supply of the aged we develop a simple life cycle model that captures the effect of social security on the joint choice of the date of retirement and hours of work immediately after retirement we show that in the presence of social security the budget constraint relating these choices is highly complex and nonlinear and we develop a maximum likelihood procedure for the model that yields consistent parameter estimates our procedure avoids the selectivity biases present in prior studies that have ignored the nonlinearity of the constraint or have examined only self selected subsamples that exclude nonretirees our results show that social security has a significant though relatively small effect on the age of retirement and postretirement hours of work and that the effect of social security grows with advancing age

the dow theory william peter hamilton s track record reconsidered alfred cowles test of the dow theory apparently provides strong evidence against the ability of wall street s most famous chartist to forecast the stock market cowles 1934 analyzes editorials published by the chief exponent of the dow theory william peter hamilton we review cowles evidence and find that it supports the contrary conclusion hamilton s timing strategies actually yield high sharpe ratios and positive alphas for the period 1902 to 1929 neural net modeling to replicate hamilton s market calls provides interesting insight into the dow theory and allows us to examine the properties of the theory itself out of sample alfred cowles test of the dow theory apparently provides strong evidence against the ability of wall street s most famious chartist william peter hamilton to forecast the stock market cowles 1934 analysis is a landmark in the development of empirical evidence about the informational efficiency of the market he claims that market timing based on the dow theory results in returns that lag the market in this paper we review cowles evidence and find that it supports the contrary conclusion the dow theory as applied by hamilton over the period 1902 to 1929 yields positive risk adjusted returns the difference in the results is apparently due to t he lack of adjustment for risk cowles compares the returns obtained from hamilton s market timing strategy to a benchmark of a fully invested stock portfolio in fact the hamilton portfolio as cowles interprets it is frequently out of the market adjustment for systematic risk appears to vindicate hamilton as a market timer to estimate the risk adjusted returns that may have been obtained by following the dow theory over the hamilton period we classify the miarket forecasts he made in the 255 editorials published in the wall street journal during his tenure as editor using the risk less rate as a benchmark we find that hamilton s ratio of correct to incorrect calls is higher than would be expected by chance using total return data for the cowles index of stock market returns and the s p index over the 27 year period we find that the

exploring the drivers side of the blend wall u s consumer preferences for ethanol blend fuels abstract analysis of stated preferences from over 2300 u s respondents shows that general attitudes nationwide favor the use of ethanol as a motor fuel but a sizeable segment 20 indicated strong unwillingness to buy ethanol blend fuels results from a discrete choice experiment analyzed using mixed logit regressions show that all else constant price per gallon and miles per gallon dominated preferences for fuel attributes but ethanol content made the average consumer more likely to choose a blend fuel findings provide strong evidence of heterogeneity in preferences driven by attitudes but also affected by age and income at a point of price per mile equivalence for ethanol and gasoline in a market where gasoline e20 and e85 were available with no regulatory supply or technological constraints e85 would dominate market share in this case ethanol would account for 56 of volume of motor fuels consumed our results show a high level of consumer substitutability of gasoline with ethanol and willingness to choose high ethanol blend fuels which could help expand ethanol use beyond the current regulatory and technological limits of the blend wall

nonlinear time series analysis of stock volatilities summary the absolute value of the mean corrected excess return is used in this paper to measure the volatility of stock returns we apply various nonlinearity tests available in the literature to show that such volatility series are strongly nonlinear we then explore the use of threshold autoregressive tar models in describing monthly volatility series the models built suggest that the volatility series exhibit significant lower order serial correlations when the volatility is large indicating certain volatility clustering in stock returns out of sample forecasts are used to compare the tar models with linear arma models and nonlinear garch and egarch models based on mean squared error and average absolute deviation the comparisons show that a the tar models consistently outperform the linear arma models in multi step ahead forecasts for large stocks b the tar models provide better forecasts than the garch and egarch models also for the volatilities of large stock returns and c the egarch model gives the best long horizon volatility forecasts for small stock returns

chaos and the compass rose abstract we show that the recently discovered compass pattern in stock returns that results from discrete jumps of stocks seriously distorts the null distribution of the brock dechert scheinkmann bds chaos test under the null hypothesis of i i d returns the true rejection probability exceeds the nominal size by wide margins which suggests that much of the evidence for chaos that has so far been found in stock returns might well be due to the fact that prices change only in discrete ticks

nonlinear dependence in finnish stock returns abstract past research into the evolution of finnish stock returns focuses on modeling linear and nonlinear dependence using various arima and garch formulations respectively this paper extends the extant work by using grassberger procaccia correlations dimensions to explore the nature of the nonlinear dynamics in daily finnish stock returns during the 1970s and 1980s nonlinear behavior in both periods is evident a simple garch model removes the nonlinearity in the first decade and dramatically reduces the nonlinearity in the second period this supports the notion that finnish stock returns exhibit nonlinear dependence but that the form of dependence is not chaotic

changes in pension incentives through time a common assumption in the compensation and retirement literature often necessitated by lack of data is that company sponsored pensions are static institutions the present paper a study of the pension plans at 14 companies for the years 1960 1970 and 1980 challenges this assumption showing that pension schemes are actually quite dynamic over time specifically the authors find that in 1960 all 14 pension plans tended to reward delayed retirement but by 1980 many of the union plans actively encouraged early retirement nonunion plans in the sample however rewarded deferred retirement in all three years the observed changes in pension incentives may have resulted in part from statutory increases in the age at which workers can be forced to retire by an employer

nonlinear dynamics and stock returns simple deterministic systems are capable of generating chaotic output that mimics the output of stochastic systems for this reason algorithms have been developed to distinguish between these two alternatives these algorithms and related statistical tests are also useful in detecting the presence of nonlinear dependence in time series in this article the authors apply these procedures to stock returns and find evidence that indicates the presence of nonlinear dependence on weekly returns from the center for research in security prices value weighted index copyright 1989 by the university of chicago

martingales nonlinearity and chaos abstract in this article we provide a review of the literature with respect to the efficient markets hypothesis and chaos in doing so we contrast the martingale behavior of asset prices to nonlinear chaotic dynamics discuss some recent techniques used in distinguishing between probabilistic and deterministic behavior in asset prices and report some evidence moreover we look at the controversies that have arisen about the available tests and results and raise the issue of whether dynamical systems theory is practical in finance

is the business cycle characterized by deterministic chaos abstract tests are conducted on u s macroeconomic data for the presence of low dimensional deterministic chaos where deterministic chaos is defined as in grandmont s 1985 walras bowley lecture or in brock 1986 the idea is to test for evidence of endogenous instability causing the business cycle low order autoregressions are hard to reject with our methods evidence of chaos is weak but our tests may be too weak to detect it evidence of nonlinearity is present in employment 1950 i to 1983 iv unemployment 1949 i to 1982 iv monthly post war industrial production and pig iron production 1877 1937

relationship between ethanol and gasoline aids approach abstract ethanol production in the united states has increased significantly due to government support which has begun to dwindle ethanol now seems to compete with gasoline for vehicle fuel but because ethanol is mostly sold as a blend gasoline and ethanol could be complementary fuel sources the study investigates the true relationship between these fuels since it has policy implications results of la aids estimation show the two fuels were substitutes before the rapid expansion of ethanol production but have become complements overtime due to increasing share of ethanol in fuel consumption

using real option analysis to quantify ethanol policy impact on the firm s entry into and optimal operation of corn ethanol facilities abstract ethanol crush spreads are used to model the value of a facility which produces ethanol from corn a real option analysis is used to investigate the effects of model parameters on the related managerial decisions of i how to operate the facility through optimal switching from idled to operational status and ii the decision to enter into the project given its expected real option net present value we present evidence of increased correlation between corn and ethanol prices perhaps as a result of government policy which has induced more players to enter into the market this paper investigates the subsequent negative effects on firms further this paper illustrates the impact of an abrupt change in government policy as what happened in january 2012 on a firm s decision to enter the business

the euro dollar exchange rate chaotic or non chaotic a continuous time model with heterogeneous beliefs abstract the aim of this paper is to develop a continuous time exchange rate model that allows for heterogeneity of the agents beliefs in order to explore non linearities and possible chaotic behaviour the theoretical model contains an intrinsic non linearity that gives rise to a jerk differential equation which is in principle capable of generating chaos the model is econometrically estimated in continuous time with euro dollar data and examined for the possible presence of chaotic motion our results indicate that the possibility of chaotic dynamics in our model is rejected

chaos significance mechanism and economic applications imagine a bargaining model say involving diplomats negotiating tariff levels or a disarmament treaty in which each party has been instructed by higher headquarters to respond to each new offer by her opposite number with a counteroffer that is to be calculated from a simple reaction function provided in advance both negotiating parties are prohibited from revealing their own reaction functions to the other if the perfectly deterministic sequence of offers and counteroffers that must emerge from these simple rules were to begin to oscillate wildly and apparently at random the negotiations could easily break down as each party not understanding the source of the problem came to suspect the other side of duplicity and sabotage yet all that may be involved as we will see is the phenomenon referred to as chaos a case that is emphatically not pathological but in which a dynamic mechanism that is very simple and deterministic yields a time path so complicated that it will pass most standard tests of randomness chaos has become a subject of great interest to specialists and nonspecialists alike besides economics it has entered the literature of geometry physics ecology and meteorology it has been written about at length in the new york times magazine and scientific american as well as technical publications this article seeks to describe what it is how it works and what it means for economics

long run money demand revisited evidence from a non linear approach abstract in this paper we argue that employing the conventional linear cointegration approach in examining long run money demand may not be appropriate after taking into account the existence of transaction costs we provide evidence to show that deviations from equilibrium money demand follow an exponential smooth transition autoregressive process that is mean reverting outside a given range and has a unit root inside the range our findings also provide an alternative explanation for the failure of much of the existing literature to support a long run money demand function

renewing assets with uncertain revenues and operating costs we study optimal replacement and abandonment decisions for real assets when both revenues and costs are uncertain and deteriorate with age we develop an implicit representation of the renewal boundary as the solution to a set of simultaneous equations this quasi analytical method has the merit of computational ease and transparency we show that the correlation between revenues and operating costs has a significant influence on the renewal boundary and that the increase in revenue immediately following a renewal has a greater relative influence on the boundary than either operating cost or renewal cost the quasi analytical method is sufficiently flexible to deal with other real option models involving 2 variables

estimating the influence of u s ethanol policy on plant investment decisions a real options analysis with two stochastic variables abstract u s ethanol policies have contributed to changes in the levels and the volatilities of revenues and costs facing ethanol firms the implications of these policies for optimal investment behavior are investigated through an extension of the real options framework that allows for the consideration of volatility in both revenue and cost components as well as the correlation between them the effects of policy affecting plant revenues dominate the effects of those policies affecting production costs in the absence of these policies much of the recent expansionary periods would have not existed and market conditions in the late 1990s would have led to some plant closures we also show that regardless of plant size u s ethanol policy has narrowed the distance between the optimal entry and exit curves implying a more narrow range of inactivity and indicative of a more volatile evolution for the industry than would have existed otherwise

on nonlinear dynamics the case of the pork cycle new methods for analyzing nonlinear dynamic processes are used to evaluate the hogcorn price ratio the results present evidence of nonlinear dynamics in the pork cycle moreover while garch processes account for some of the nonlinearities the pork cycle is apparently characterized by more complex dynamic forms the empirical analysis provides some evidence of the presence of chaos in the pork cycle the results also indicate that the dynamic process generating the pork cycle is nonlinear and cannot be adequately characterized by a small number of state variables

a search for long memory in international stock market returns abstract a major issue in financial economics is the behavior of stock returns over long as opposed to short horizons this study provides empirical evidence from the perspective of long memory analysis international evidence on long memory is explored using the morgan stanley capital international stock index data for eighteen countries two tests that are robust to short term dependence and conditional heteroskedasticity are employed a modified rescaled range test and a fractional differencing test the empirical results in general provide little support for long memory in international stock returns the findings are not sensitive to inflation adjustments in stock returns data sources and statistical methods used

statistical inference based upon non linear science abstract this paper discusses testing for the presence of deterministic chaos and presents probems surrounding such research statistical inference methods arising from the study of non linear dynamics are presented along with research utilizing these methods the general goal of these inference methods is to test for evidence of hidden structures in economic time series data which may lead to a greater understanding of how the economy functions while evidence of significant non linear structure has been demonstrated in many economic and financial time series precisely how important these structures are to economic science is a relevant issue

does compulsory school attendance affect schooling and earnings we establish that season of birth is related to educational attainment because of school start age policy and compulsory school attendance laws individuals born in the beginning of the year start school at an older age and can therefore drop out after completing less schooling than individuals born near the end of the year roughly 25 percent of potential dropouts remain in school because of compulsory schooling laws we estimate the impact of compulsory schooling on earnings by using quarter of birth as an instrument for education the instrumental variables estimate of the return to education is close to the ordinary least squares estimate suggesting that there is little bias in conventional estimates every developed country in the world has a compulsory schooling requirement yet little is known about the effect these laws have on educational attainment and earnings 1 this paper exploits an unusual natural experiment to estimate the impact of compulsory schooling laws in the united states the experiment stems from the fact that children born in different months of the year start school at different ages while compulsory schooling laws generally require students to remain in school until their sixteenth or seventeenth birthday in effect the interaction of school entry requirements and compulsory schooling laws compel students born

pairs selection and outranking an application to the s p 100 index pairs trading is a popular quantitative speculation strategy this article proposes a general and flexible framework for pairs selection the method uses multiple return forecasts based on bivariate information sets and multi criteria decision techniques our approach can be seen as a sort of forecast combination but the output of the method is a ranking it helps to detect potentially under and overvalued stocks a first application with s p 100 index stocks provides promising results in terms of excess return and directional forecasting

comment on nonlinear monetary dynamics by decoster and mitchell the concept of dimension its uses and the difficulties in estimation are not universally well understood a recent article in the journal of business economic statistics by decoster and mitchell 1991 dm illustrates our claim dimension calculations are useful for characterizing the topological properties of the data the nonexistence of a lowdimensional attracting set however implies nothing about the presence of complicated dynamics for succinct reference to these ideas see ramsey sayers and rothman 1990 the purpose of this comment is twofold first we wish to remind the reader of two practical difficulties in estimating the grassberger and procaccia gp dimension concept second using an alternative procedure that mitigates many of the problems that stem from small sample sizes we reestimate dm s strongest result and show that the finding of nonlinearity in divisia m2 see p 460 of dm cannot be sustained by the dimension calculations cited the interested reader can find a more complete discussion of these and related issues in the article by ramsey and rothman 1992 and the references cited therein

investment firm value and risk for a system operator balancing energy grids abstract with the liberalization of energy markets integrated energy companies have separated into entities that specialize in production and or transmission of energy transmission of energy requires balancing the grid to guarantee system security which is performed by the independent system operator so when the so faces stochastic demand grid balancing has sizeable consequences on current and future profits and hence on firm value and firm risk we explore these value and risk consequences with and without an investment option to expand transmission capacity we show that firm value consists of the value of the transmission capacity in place plus the value of a short put and a short call option that are the result of the so s balancing actions firm risk without investment option is non linear and determined by the short option positions it is decreasing with increasing energy demand the existence of an option to expand transmission capacity increases firm value and firm risk

testing for linear and nonlinear granger causality in the stock price volume relation linear and nonlinear granger causality tests are used to examine the dynamic relation between daily dow jones stock returns and percentage changes in new york stock exchange trading volume we find evidence of significant bidirectional nonlinear causality between returns and volume we also examine whether the nonlinear causality from volume to returns can be explained by volume serving as a proxy for information flow in the stochastic process generating stock return variance as suggested by clark s 1973 latent common factor model after controlling for volatility persistence in returns we continue to find evidence of nonlinear causality from volume to returns

are commodity prices chaotic we conduct tests for the presence of low dimensional chaotic structure in the futures prices of four important agricultural commodities though there is strong evidence of non linear dependence the evidence suggests that there is no long lasting chaotic structure the dimension estimates for the commodity futures series are generally much higher than would be for low dimension chaotic series our test results indicate that autoregressive conditional heteroskedasticity arch type processes with controls for seasonality and contract maturity effects explain much of the non linearity in the data we make a case that employing seasonally adjusted price series is important in obtaining robust results via some of the existing tests for chaotic structure finally maximum likelihood methodologies that are robust to the non linear dynamics lend strong support to the samuelson hypothesis of maturity effects in futures price changes 2002 elsevier science b v all rights reserved

exchange rate dynamics central bank interventions and chaos control methods abstract we use a simple chartist fundamentalist model developed by day and huang to explore recent chaos control algorithms as potential candidates for central bank intervention rules we find that methods such as delayed feedback control ogy and constant feedback have in principle the potential to reduce exchange rate variability and deviations from fundamentals even in the presence of large dynamic noise

chaotic dynamics in a cash in advance economy abstract this paper introduces sufficient conditions for the existence of deterministic cycles and chaos in cash in advance models building on the earlier work of woodford 1994 chaotic equilibria are shown to be particularly likely in the cash in advance model because of a unique characteristic of such models a discontinuous derivative in the difference equation map at the satiation level of real balances the existence of a kink means that chaotic equilibria may exist without implausibly large curvatures in the utility function since a chaotic time series that makes use of the kink would sometimes exhibit zero nominal interest rates the paper also gives an example of chaos in which nominal interest rates remain strictly positive

how market efficiency and the theory of storage link corn and ethanol markets this article uses the theories of market efficiency and supply of storage to develop a conceptual link between the corn and ethanol markets and explores statistical evidence for the link we propose that a long run no profit condition is established in distant futures markets for ethanol corn and natural gas and then use the theory of storage to define an inter temporal equilibrium among these prices the relationship shows that under certain conditions future price expectations will influence nearby futures prices and that a short term relationship between input and output prices will exist we demonstrate validity of the theory using a structural price model and then by means of time series techniques

valuing investment decisions of renewable energy projects considering changing volatility abstract volatility is an important parameter when evaluating investments using the real options method for renewable energy investments the volatility of cash flow continuously changes because as new information and knowledge are gathered there is less foreseen variation this paper proposes an extended recombining trinomial tree model where the changing volatility is used to generate transition probabilities the changing volatility is generated using a consolidation process where multiple random variables including the market price of electricity carbon price and lending rate are integrated into a low dimension stochastic process a two factor learning curve is used to model the changes of investment cost we apply the proposed model to analyze solar photovoltaic pv power generation investment in china the results show volatility with changing feature compared with constant volatility changing volatility may advance investment decisions and change the project value complete grid parity policy in the solar pv industry is infeasible because the opportunity cost brought by the option of delaying cannot be offset the changing volatility may produce a lower and equally effective subsidy level compared with constant volatility a carbon emission trading scheme is helpful in advancing investments in renewable energy which is reflected in improvements in project value advancements in investment decisions and reductions in the required subsidy level

stabilization policy can lead to chaos stabilization policy can lead to chaos nonlinearities in economies as elsewhere can generate chaotic equilibria the presence of pareto inferior chaotic equilibria might seem reason enough to use stabilization policy to select preferable equilibria however i show that a stabilization policy with feedback can itself lead to chaotic dynamics thus the existence of nonlinearities in the economy does not by itself justify monetary or fiscal policies aimed at reducing economic instability current evidence cannot distinguish whether monetary policy stabilizes a nonlinear economy creates nonlinear dynamics in the economy or both i introduction in recent years the claim has been made that nonlinearities and self fulfilling expectations in the private economy generate economic instability that can and should be offset by government policies this instability shows up as a positive variance in the steady state of an economy that otherwise would have a steady state with zero variance and higher utility for households on the basis of such models grandmont and malgrange 1986 9 conclude that we should expect a free market economy to perform rather badly under laissez faire in addition there is a possible role for deterministic stabilization policies that would if understood and believed eliminate forecasting mistakes and the corresponding efficiency losses and would guarantee the ultimate disappearance of endogenous fluctuations the purpose of this note is to provide a simple example of stabilization policy leading to chaotic time series behavior this example is an elaboration of friedman s 1953 classic argument that with uncertain knowledge about the economy stabilization policy can increase the variance of the goal variable nonlinearities can make as much a case against stabilization policy as for it the example is ad hoc in some respects but it is based on common ingredients of many models ii a simple example interesting aspects of an economy can be summarized by the quantity equation 1 mv y assume that real income y is constant which implies that changes in nominal income are proportional to changes in the price level in one respect using the quantity equation means that the example below does not have the same force as a tight general equilibrium model of the economy without the underlying detail equation 1 is ad hoc in another respect the example below has more force an equation such as 1 commonly characterizes the general equilibrium models in which money has a significant effect on the economy hence one interpretation is that the example has some generality assume that the monetary authority targets nominal income and knows 1 that the quantity theory characterizes the long run equilibrium of the economy and 2 the level of velocity that is consistent with zero inflation v in these circumstances there is one obvious equilibrium consistent with the goal the money stock is constant and the public expects a constant money supply and zero inflation in this equilibrium nominal income can be stabilized at the target level of nominal income y the monetary authority just need set the money supply to m v 1y if the monetary authority is uncertain about the public s response to its actions one strategy is to adopt a cautious stabilization policy to support the economy s approach to the long run deterministic equilibrium one commonly proposed set of feedback rules is the proportional policies introduced by phillips 1954 in the levels such a rule for the money supply is 2 m m alpha y y sub 1 where y sub 1 is last period s nominal income and alpha is the adjustment parameter assume that private agents believe that the monetary authority eventually will accomplish its goal of setting y equal to y

implications of nonlinear dynamics for financial risk management this paper demonstrates that when log price changes are not iid their conditional density may be more accurate than their unconditional density for describing short term behavior using the bds test of independence and identical distribution daily log price changes in four currency futures contracts are found to be not iid while there appear to be no predictable conditional mean changes conditional variances are predictable and can be described by an autoregressive volatility model that seems to capture all the departures from independence and identical distribution based on this model daily log price changes are decomposed into a predictable part which is described parametrically by the autoregressive volatility model and an unpredictable part which can be modeled by an empirical density either parametrically or nonparametrically this two step seminonparametric method yields a conditional density for daily log price changes which has a number of uses in financial risk management

cointegration and detectable linear and nonlinear causality analysis using the london metal exchange lead contract this study applies linear and nonlinear granger causality tests to examine the dynamic relation between london metal exchange lme cash prices and three possible predictors the analysis uses matched quarterly inventory uk treasury bill interest rates futures prices and cash prices for the commodity lead traded on the lme the effects of cointegration on both linear and nonlinear granger causality tests is also examined when cointegration is not modelled evidence is found of both linear and nonlinear causality between cash prices and analysed predictor variables however after controlling for cointegration evidence of significant nonlinear causality is no longer found these results contribute to the empirical literature on commodity price forecasting by highlighting the relationship between cointegration and detectable linear and nonlinear causality the importance of interest rate and inventory as well as futures price in forecasting cash prices is also illustrated failure to detect significant

non linear granger causality in the currency futures returns abstract this paper examines the relationship between currency futures returns by employing a test for non linear causality the results indicate evidence of unidirectional non linear causality relationship in four cases however after filtering the returns using a garch 1 1 model we find insignificant and statistically weaker non linear causality relationships

is the us business cycle asymmetric some further evidence evidence of nonlinearity in growth rates of monthly industrial production unit labour costs consumer prices and unemployment is reported and alternative representations of that nonlinearity exami

the demand for e85 geographical location and retail capacity constraints abstract consumption of high ethanol gasoline blends must increase if united states renewable biofuel mandates are to rise above current levels as envisioned by the renewable fuel standard one such blend is e85 which contains no more than 85 ethanol and no less than 15 gasoline we derive the demand for e85 based on a model of motorists preferences for motor fuel blends and calibrate the demand for e85 using data on the location of flex vehicles and fuel stations that sell e85 in the united states we also show how limits on the capacity of fuel stations to sell e85 affect demand and explore the potential future demand for e85 by increasing the number of fuel stations offering e85 and the number of flex vehicles we show that the existing fleet of flex vehicles is sufficient to accommodate more than 15 billion gallons of ethanol without a large price discount on e85 only if the number of stations that sell e85 increases substantially provided with fast enough installation of new e85 pumps this level of consumption would be sufficient to meet the mandates envisioned for conventional ethanol by 2015

trading asymmetric trend and volatility by leverage trend garch in taiwan stock index this article develops a leverage trend generalized autoregressive conditional heteroscedasticity garch model by incorporating asymmetric trend of returns of the exponential autoregressive and asymmetric volatility of garch models to study the asymmetric effects using in sample daily data of taiex over the period 4 january 1980 to 25 august 1997 and postsample daily data over the period 26 august 1997 to 10 september 2007 the evidence reveals that a curvaceous risk return relationship and both asymmetric volatility and asymmetric trend of returns are significant in taiex the episode of asymmetric trend of returns is that the positive information creates a higher return trend than the negative information of the same amount while similarly to most studies the evidence of asymmetric volatility appears that the negative information makes a higher volatility than the positive information of the same size most remarkably we evidence that the volatility asymmetry effect is a conservative trading factor

using a spark spread valuation to investigate the impact of corn gasoline correlation on ethanol plant valuation article i nfo corn ethanol plants have been criticized for a number of reasons in recent years this paper provides another ground for criticizing theseplants historical corn and gasoline pricesare uncorrelated but widespread adoption of corn ethanol production might reasonably lead to future correlation between these prices we present a real options like valuation of an ethanol plant as a spark spread between the corn price and the gasoline price this analysis shows that the value of an ethanol plant monotonically decreases with increasing correlation and the optimalproductionschedulegreatlydependsonthecorrelation evenrelativelysmallnewcorrelationscanresult inasignificantproportionalvaluedecrease a50 correlationbetweencornandgasolinecausesethanolplantsto lose 10 of their value the limiting case of full correlation would lead to a 30 value loss

some evidence concerning macroeconomic chaos abstract an empirical assessment of a linear stochastic perspective for canadian macroeconomic time series is presented the methods used are based on the mathematics of chaos present evidence suggests that low order deterministic chaos does not provide a satisfactory characterization of the data the absence of significant nonlinear structure for the investment and unemployment series is of particular note in light of past findings with american data the degree to which the use of a time trend can impose a pseudo structure on the data is illustrated

the early retirement decision new empirical evidence on the influence of health many studies have examined the influence of health on retirement but there may be problems with the various health measures used a major criticism of the most frequently used variables is that they may reflect ex post rationalizations of retirement in this paper i examine a variety of health variables focusing directly on the health measurement issue as it relates to retirement research new measures of health are developed with individual self evaluations of health status unlike most previous findings the empirical results suggest that economic variables play a more important role than health in retirement decisions

linear and nonlinear dependence in turkish equity returns and its consequences for financial risk management abstract this paper investigates the dynamic behaviour of daily aggregate returns of one of europe s largest and fastest growing emerging equity markets the istanbul stock exchange ise it is found that ise returns exhibit significant linear and nonlinear dependence we investigate the nature and source of the nonlinear dependence and find that it is due primarily to linear dependence in the conditional variance of returns rather than nonlinear dependence in the conditional mean we analyse the implications of our findings for financial risk management we show that by exploiting the nonlinear dependence in ise returns the average capital required to cover against unexpected portfolio losses can be considerably reduced in contrast exploiting the linear dependence in ise returns has only a negligible impact on capital requirements

short waves in hungary 1923 and 1946 persistence chaos and lack of control abstract monetary policies follow a complex and chaotic process one that is enhanced when monetary growth is taken to the extreme as in hyperinflation while we have a basic understanding of the complex dynamics of hyperinflation a less explored phenomenon accompanying hyperinflationary episodes is the effect that they have on institutional development building on recent advances in economic history examining monetary policy and institutions this analysis uses more explicit recourse to complexity theory and in particular complex adaptive systems to examine two separate hyperinflationary episodes in hungary 1923 and 1946 delving into the institutional and cultural roots of the inflationary policies of the hungarian government and detailing the institutional effects which succeeded hyperinflation this paper shows that the twin experiences of hungary were both chaotic and created a chaotic and complex aftermath the results of which are still being felt indeed hungary s 1923 and especially its 1946 hyperinflation shows that some economic chaos cannot be restrained by political institutions and in fact the institutions themselves were changed when staring into the abyss hungary also found that the abyss stared back

nonlinear dynamics in real time equity market indices evidence from the united kingdom this paper tests for the presence of nonlinear dependence and chaos in real time returns on the u k ftse 100 index using a six month sample of about 60 000 observations since there is clear evidence of nonlinearity the authors follow other researchers in this field by applying the same tests to the residuals from a garch process fitted to the data in order to find out whether or not the nonlinearity can be explained by this type of model in the event their results suggest that garch can explain some but not all of the observed nonlinear dependence copyright 1995 by royal economic society

the effects of social security reforms on retirement ages and retirement incomes abstract recent changes legislated in the u s social security system have altered the economic incentives to work and retire some older workers will respond to these new incentives by retiring at different ages this paper evaluates the signs and magnitudes of these responses four specific changes in the structure of social security benefits are examined raising the normal retirement age delaying the cost of living adjustment lowering early retirement benefits and increasing late retirement payments behavioral parameters are estimated using an ordered logit model of retirement ages these are used to predict how retirement behavior might respond to each of the four reforms predicted changes in retirement ages will be too small to compensate retirees for reductions in benefit formulas thus the social security s financial burden will be eased but retirees incomes will fall on average

is now a good time for iowa to invest in cellulosic biofuels a real options approach considering construction lead times abstract the revised renewable fuel standard of the u s mandates a production of 16 billion gallons per year by 2022 from cellulosic biofuels iowa rich in agricultural residues like corn stover is a major player in contributing to the fulfillment of the cellulosic biofuels mandate is it a good time for iowa to start investing in cellulosic biofuels using a fast pyrolysis facility as an example we present a real options approach for valuing the investment of a new technology for producing cellulosic biofuels subject to construction lead times and uncertain fuel price we conduct a case study on iowa in which the decision maker finds the optimal investment time for the fast pyrolysis facility subject to production and distribution constraints our result indicates that the project is profitable if the facility is invested now but could be more profitable if invested later namely now it is not the optimal time for iowa to start constructing the fast pyrolysis facility we also find that the impact of the lead time on the project value is too significant to overlook the profitability of the project is sensitive to the outlook of fuel price if the future retail fuel price drops just 7 lower than forecasted by the energy information administration the investment may not be profitable the impact of the technology improvement production yield and biomass feedstock price is also analyzed using regression

nonlinear behaviour of emerging market bonds spreads the latin american case in this article we check for nonlinear behaviour of the 10 most important latin american emerging market bonds spreads applying the hinich portmanteau bicorrelation test the bds test and the engle lm test we observe systematic nonlinear structure in the spreads series our results suggest that the nonlinear serial dependencies are episodic in nature all the stock returns series with the exception of mexico are characterized by few brief periods of highly significant nonlinearity followed by long time periods in which the returns follow a pure noise process our findings support the idea that even in this well informed and sophisticated market the weak form of the efficient market hypothesis cannot be supported

some empirical evidence on the time series properties of four uk asset prices in this paper the authors examine the time series behavior of four u k asset prices and estimate two types of models for the differenced series much previous research has found the presence of time varying heteroskedasticity in the error process for asset prices a linear model with gqarch errors is compared to a joint bilinear model with gqarch errors the latter choice motivated by the ability of bilinear models to capture turbulent behavior the adequacy of these models is determined by examining simulations and also employing test statistics the forecasting performance of the two models is also compared copyright 1996 by the london school of economics and political science