some nonlinear tax effects on asset values and investment decisions under uncertainty abstract tax system nonlinearities are often ignored but with uncertainty may have important implications for the magnitude and direction of tax effects this paper studies a particular nonlinear tax rule the policy subsidizes asset values but may discourage some investments and encourage earlier shutdown of some projects the marginal effective tax rate varies with project risk furthermore a corporate cash flow tax can encourage investment due to interactions with the nonlinear policy the paper also presents a general statement of the stochastic equilibrium valuation method which can be used to analyze other nonlinear taxes numerical examples demonstrate computational feasibility

is the secularization hypothesis valid a panel data assessment for taiwan the secularization thesis is based on the idea that a country becomes more secular as it becomes richer and more industrialized in order to investigate whether this hypothesis is valid we examine the relationship between religion in taiwan and economic development across 23 counties by adopting the panel data approach for the period 1998 to 2003 we select six religious activity proxy variables and five economic development variables in a cross county panel data framework the evidence indicates that the ratio of females to males has a significantly positive effect and that the literacy rate and population density each have a significantly negative effect on the religious variables finally except for the christian culture the unemployment rate has a positive effect on the religious variables our findings thus support the view that the religious secularization hypothesis is valid in taiwan

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

what motivates merger and acquisition activities in the upstream oil gas sectors in the u s abstract the u s oil and gas o g industry has experienced a tremendous amount of growth in the last decade or so due to the development of horizontal drilling and fracking technology in the meantime the industry has experienced heavy merger and acquisition m a activity especially in the upstream sectors while these m a activities may be related to the aggregate m a waves in the country they are unique in their own respect we recognize that the m a activities in the energy industry in general and the o g sectors in particular can be different from the traditional sense of m a activities in this paper we provide some stylized facts on the m a patterns in the upstream o g sectors focusing on the factors that influenced these patterns our empirical evidence suggests that among the variables we studied oil price and o g production are the most important factors that influence m a activities while other variables do not show consistent effect across regions and definitions of m a in addition the m a activities had momentum building periods and had patterns consistent with a wave hypothesis our findings support the notion that industry specific factors are more important than general economic conditions in determining m a in the o g industry we find evidence supporting both the behavioral and neoclassical theories on m a

biofuel from jatropha curcas environmental sustainability and option value abstract this paper considers the use of a non edible plant jatropha curcas j curcas for the production of biofuel as a substitute for traditional fossil fuel it is shown that the net energy balance and greenhouse gases ghgs balance are positive the investment value in biofuel from j curcas is also studied and both its intrinsic and option values are calculated a reference case is evaluated namely the cultivation of j curcas as a substitute for conventional fuel in a specific less developed country kenya that lies in the tropical region where j curcas grows the investment is modeled as a perpetual investment call option it is shown that the net present value is positive for a vast range of discount factors and investment costs while the option value depends crucially on the parameters of the model a positive option value points out those cases in which it is optimal to defer the investment even if it entails a positive and possibly high net present value

stochastic convenience yield and the pricing of oil contingent claims this paper develops and empirically tests a two factor model for pricing financial and real assets contingent on the price of oil the factors are the spot price of oil and the instantaneous convenience yield the parameters of the model are estimated using weekly oil futures contract prices from january 1984 to november 1988 and the model s performance is assessed out of sample by valuing futures contracts over the period november 1988 to may 1989 finally the model is applied to determine the present values of one barrel of oil deliverable in one to ten years time

oil prices brownian motion or mean reversion a study using a one year ahead density forecast criterion abstract for oil related investment appraisal an accurate description of the evolving uncertainty in the oil price is essential for example when using real option theory to value an investment a density function for the future price of oil is central to the option valuation the literature on oil pricing offers two views the arbitrage pricing theory literature for oil suggests geometric brownian motion and mean reversion models empirically driven literature suggests arma garch models in addition to reflecting the volatility of the market the density function of future prices should also incorporate the uncertainty due to price jumps a common occurrence in the oil market in this study the accuracy of density forecasts for up to a year ahead is the major criterion for a comparison of a range of models of oil price behaviour both those proposed in the literature and following from data analysis the kullbach leibler information criterion is used to measure the accuracy of density forecasts using two crude oil price series brent and west texas intermediate wti representing the us market we demonstrate that accurate density forecasts are achievable for up to nearly two years ahead using a mixture of two gaussians innovation processes with garch and no mean reversion

models of stock returns a comparison in this paper a discrete mixture of normal distributions is proposed to explain the observed significant kurtosis fat tails and significant positive skewness in the distribution of daily rates of returns for a sample of common stocks and indexes stationarity tests on the parameter estimates of this discrete mixture of normal distributions model revealed significant differences in the mean estimates that can explain the observed skewness and significant differences in the variance estimates that can explain the observed kurtosis an alternative explanation for the observed fat tails is the symmetric student model the result of a comparison between the models is that the discrete mixture of normal distributions model has substantially more descriptive validity than the student model for many years both financial economists and statisticians have been concerned with the description of stock market returns the form of the distribution of stock returns is a crucial assumption for mean variance portfolio theory theoretical models of capital asset prices and the prices of contingent claims for example understanding the behavior of the variance is essential to option pricing models empirical tests of asset pricing models and the efficient markets hypothesis draw statistical inferences that are also conditional on distributional assumptions the most convenient assumption for financial theory and empirical methods is that the distribution of security rates of return be multivariate normal with parameters that are stationary over time since the normal distribution is stable under addition any arbitrary portfolio of stocks will also be normally distributed with the additional assumption of risk aversion mean variance theory follows furthermore the assumptions of normality and parameter stationarity are required for most of the econometric techniques typically used in empirical research tests of the normality hypothesis on the daily returns of the dow jones industrial stocks by fama 121 revealed more kurtosis fatter tails than that predicted from a sample of independent and identically distributed normal variates fama concluded from this evidence that the distribution of price changes conforms better to the stable paretian distribution with characteristic exponent

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

leveraged investments and agency conflicts when cash flows are mean reverting we analyse the effect of mean reverting cash flows on the costs of shareholder bondholder conflicts arising from partially debt financed investments in a partial equilibrium setting we find that such agency costs are significantly lower under mean reverting mr dynamics when compared to the ubiquitous geometric brownian motion gbm the difference is attributed to the stationarity of the mr process in addition through the application of a novel agency cost decomposition we show that for a larger speed of mean reversion agency costs are driven mainly by suboptimal timing decisions as opposed to suboptimal financing decisions in contrast under the standard gbm assumption the agency costs are driven mainly by suboptimal financing decisions for large growth rates and by suboptimal timing decisions for smaller or negative growth rates

what do market calibrated stochastic processes indicate about the long term price of crude oil abstract stochastic process models of commodity prices are important inputs in energy investment evaluation and planning problems in this paper we focus on modeling and forecasting the long term price level since it is the dominant factor in many such applications to provide a foundation for our modeling approach we first evaluate the empirical characteristics of crude oil price data from 1990 to 2013 using unit root and variance ratio tests statistical evidence from these tests shows only weak support for the applicability of stationary mean reverting type processes up through 2004 with non stationary brownian motion type processes becoming more plausible when the data from 2005 to 2013 is added we then apply a kalman filtering method with maximum likelihood approach to estimate the model parameters for both a single factor geometric brownian motion gbm process as well as the two factor schwartz and smith 2000 process the latter process decomposes the spot price into unobservable factors for the long term equilibrium level and short term deviation and it accommodates aspects of both a gbm process and a mean reverting process both empirical and simulated data are analyzed with these models and we quantify the increases in both the drift rate and volatility of these processes that result from developments in the crude oil markets since the middle of the last decade we conclude by comparing and contrasting both historical accuracy and forecasts from the parameterized models and show that when the emphasis is on the long term expectations a single factor gbm forecast may be sufficient

too conservative to hedge how much does a corn ethanol facility lose abstract while the process of producing ethanol from corn has been well established for over a decade the process profitability still eludes the industry investors in particular uncertainties exist in both the feedstock and the product spot prices to manage the sophisticated price uncertainty current practice in industry is to negotiate long term fixed rate prices with both the suppliers of the feedstock and the purchasers of the product although this practice completely eliminates the price uncertainty and simplifies production decisions it entails the potential loss of profit stochastic programming methods provide a framework which takes into account the uncertainties and determines the decisions that are optimal under this uncertain future therefore in this study a stochastic optimization model is presented to determine the weekly production level and swap hedging portfolios over a year s planning horizon with the objective of maximizing the process profit the approach is also used in a back testing perspective to compare the profit obtained from applying the optimal decisions with the negotiated profit derived from using the current practice this comparison in turn validates the effectiveness of the proposed model framework in particular during times of high price uncertainty

investor valuation of the abandonment option abstract we investigate whether investors price the option to abandon a firm at its exit value theory prices this real option as an american put with both a stochastic strike price exit value and a stochastic value of the underlying security the value of cash flows the empirical implications are that firm value increases in exit value after controlling for expected going concern cash flows and that more generalizable assets produce more abandonment option value using discounted earnings forecasts to proxy for expected cash flows and prior literature to categorize asset generalizability we find strong support for the predictions of abandonment option theory

islamic banking and finance recent empirical literature and directions for future research this paper examines the recent empirical literature in islamic banking and finance highlights the main findings and provides a guide for future research early studies focus on the efficiency production technology and general performance features of islamic versus conventional banks whereas more recent work looks at profit and loss sharing pls behaviour competition risks as well as other dimensions such as small business lending and financial inclusion apart from key exceptions the empirical literature suggests no major differences between islamic and conventional banks in terms of their efficiency competition and risk features although small islamic banks are found to be less risky than their conventional counterparts there is some evidence that islamic finance aids inclusion and financial sector development results from the empirical finance literature dominated by studies that focus on the risk return features of mutual funds finds that islamic funds perform as well if not better than conventional funds there is little evidence that they perform worse than standard industry benchmarks some recent evidence however suggests that islamic bond sukuk issuance destroys value for shareholders

strategic entry and market leadership in a two player real options game abstract we analyse the entry decisions of competing firms in a two player stochastic real option game when rivals earn different but correlated uncertain profitabilities from operating in the presence of entry costs decision thresholds exhibit hysteresis the range of which is decreasing in the correlation between competing firms a measure of the expected time of each firm being active in the market and the probability of both rivals entering within a finite time are explicitly calculated the former latter is found to decrease increase with the volatility of relative firm profitabilities implying that market leadership is shorter lived the more uncertain the industry environment in an application of the model to the aircraft industry we find that boeing s optimal response to airbus launch of the a380 super carrier is to accommodate entry and supplement its current product line as opposed to the riskier alternative of committing to the development of a corresponding super jumbo

bond calls credible commitment and equity dilution a theoretical and clinical analysis of simultaneous tender and call stac offers this paper is an exploration of the ability of game theory to explain real world corporate maneuvering we explore this issue by investigating bond tender offers accompanied by a threat to call nontendered bonds so called simultaneous tender and call stac offers we argue that stacs engender a transparent game played by bondholders and shareholders we model this game and use this model to predict the outcome of stacs finally we investigate the issue of whether this theoretical model explains the outcomes of four actual stac issues made by james river may department stores and houston lighting power company our clinical analysis provides support for the explanatory power of our model calibrating the predictions of the model with data from these stacs we demonstrate a correspondence between theory and actual corporate behavior as predicted by our model subgame perfection or threat credibility and preplay coordination are central to explaining the outcomes of the stacs

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

holding on for too long an experimental study on inertia in entrepreneurs and non entrepreneurs disinvestment choices abstract disinvestment in the sense of project termination and liquidation of assets including the cession of a venture is an important realm of entrepreneurial decision making this study presents the results of an experimental investigation modeling the choice to disinvest as a dynamic problem of optimal stopping in which the patterns of decisions are analyzed with entrepreneurs and non entrepreneurs our experimental results reject the standard net present value approach as an account of observed behavior instead most individuals seem to understand the value of waiting their choices are weakly related to the disinvestment triggers derived from a formal optimal stopping benchmark consistent with real options reasoning we also observe a pronounced psychological inertia i e most individuals hold on to a losing project for even longer than real options reasoning would predict the study provides evidence for entrepreneurs and non entrepreneurs being quite similar in their behavior

implementing a stochastic model for oil futures prices this paper develops a parsimonious three factor model of the term structure of oil futures prices that can be easily estimated from available futures price data in addition it proposes a new simple spreadsheet implementation procedure the procedure is flexible may be used with market prices of any oil contingent claim with closed form pricing solution and easily deals with missing data problems the approach is implemented using daily prices of all futures contracts traded at the new york mercantile exchange between 1991 and 2001 in sample and out of sample tests indicate that the model fits the data extremely well though the paper concentrates on oil the approach can be used for any other commodity with well developed futures markets

an equilibrium model of investment under uncertainty this paper analyzes the optimal investment decisions of heterogeneous rms in a competitive uncertain environment we characterize rms optimal investment strategy explicitly and derive a closed form solution for rm value we show that in the strategic equilibrium real option premia are signi cant as a result rms delay investment choosing optimally not to undertake some positive npv projects the model predicts that rm returns vary over the business cycle with returns negatively skewed during expansions but positively skewed in recessions

religion and economic performance summary this paper investigates the relationship between religion and economic performance in both cross country and within country regressions the null hypothesis that religious affiliation is uncorrelated with performance can frequently be rejected i e religion matters though the regressions do not yield a robust pattern of coefficients with respect to particular religions the results with respect to islam do not support the notion that it is inimical to growth on the contrary virtually every statistically significant coefficient on muslim population shares reported in this paper in both cross country and within country statistical analyses is positive if anything islam promotes growth

options in the real world lessons learned in evaluating oil and gas investments many firms in the oil and gas business have long used decision analysis techniques to evaluate exploration and development opportunities and have looked at recent development in option pricing theory as potentially offering improvements over the decision analysis approach unfortunately it is difficult to discern the benefits of the options approach from the literature on the topic most of the published examples greatly oversimplify the kinds of projects encountered in practice and comparisons are typically made to traditional discounted cash flow analysis which unlike the option pricing and decision analytic approaches does not explicitly consider the uncertainty in project cash flows in this paper we provide a tutorial introduction to option pricing methods focusing on how they relate to and can be integrated with decision analysis methods and describe some lessons learned in using these methods to evaluate some real oil and gas investments

an option pricing approach to evaluating petroleum projects abstract option pricing applications in capital budgeting decisions are still in the development stage this paper uses concepts and methods from option pricing theory to evaluate real projects rather than financial ones within a petroleum projects context such real options include development and operations of satellite fields break even values of incremental capacity and flexibility value with compound development and operations options the option pricing results may be quite different from those obtained by traditional capital budgeting and decision tree approaches some related papers on real options are also briefly noted

unionization and distribution of income under variable returns to scale abstract variable returns to scale are introduced into the two sector analysis of unionization and income distribution and some new results are obtained specifically with increasing returns to scale it is possible for both union and non union workers to lose gain from unionization even when the unionized sector is relatively capital labor intensive

real flexibility and financial structure an empirical analysis i examine the empirical relation between real flexibility and financial structure i test whether real flexibility increases debt capacity by lowering default risk and making assets more marketable or decreases debt capacity by facilitating risk shifting and asset substitution i measure real flexibility as the sensitivity of marginal production and investment decisions to variations in the economic environment i find that financial leverage is negatively related to production flexibility but positively related to investment flexibility this split in results suggests that although asset substitution facilitated by investment flexibility can be prevented contractually risk shifting facilitated by production flexibility is intractable copyright 2003 oxford university press

short term variations and long term dynamics in commodity prices in this article we develop a two factor model of commodity prices that allows meanreversion in short term prices and uncertainty in the equilibrium level to which prices revert although these two factors are not directly observable they may be estimated from spot and futures prices intuitively movements in prices for long maturity futures contracts provide information about the equilibrium price level and differences between the prices for the short and long term contracts provide information about short term variations in prices we show that although this model does not explicitly consider changes in convenience yields over time this short term long term model is equivalent to the stochastic convenience yield model developed in gibson and schwartz 1990 we estimate the parameters of the model using prices for oil futures contracts and apply the model to some hypothetical oil linked assets to demonstrate its use and some of its advantages over the gibson schwartz model

a dynamic model of cleanup estimating sunk costs in oil and gas production the environmental remediation required to permanently decommission most industrial projects is an expensive irreversible investment real options literature shows that temporary closure has value under uncertainty however even if there is no intention to restart operations there is an incentive to label a closure as temporary to avoid having to remediate ongoing or future environmental externalities i estimate a dynamic discrete choice model of closure under price and quantity uncertainty to evaluate the likelihood of reactivation the model reveals that the option to temporarily close is being widely used to avoid environmental remediation of oil and gas wells in canada

collaborative production planning of supply chain under price and demand uncertainty abstract this research is motivated by an automobile manufacturing supply chain network it involves a multi echelon production system with material supply component fabrication manufacturing and final product distribution activities we address the production planning issue by considering bill of materials and the trade offs between inventories production costs and customer service level due to its complexity an integrated solution framework which combines scatter evolutionary algorithm fuzzy programming and stochastic chance constrained programming are combined to jointly take up the issue we conduct a computational study to evaluate the model numerical results using the proposed algorithm confirm the advantage of the integrated planning approach compared with other solution methodologies the supply chain profits from the proposed approach consistently outperform in some cases up to 13 better the impacts of uncertainty in demand material price and other parameters on the performance of the supply chain are studied through sensitivity analysis we found the proposed model is effective in developing robust production plans under various market conditions

religion politics and development lessons from the lands of islam abstract the question as to whether religion can block economic development and institutional change or is a purely endogenous factor assumes particular importance today because of the rise of islamist movements and the disappointing economic performances in the lands of islam this paper starts from a critical examination of the thesis of bernard lewis according to which the lack of separation between religion and politics creates particular difficulties on the way to modern economic growth in these lands it will be argued that 1 lewis thesis conceals the critical fact that even when political and religious functions appear to be merged religion is the handmaiden rather than the master of politics 2 the influence of religion increases when the state falls into crisis owing to its impotence or excessive absolutism 3 because the islamic frame of reference provides political rulers with a cheap default option when they are contested they rarely undertake the much needed reforms of the country s institutions 4 this way of escape is all the more attractive to contested rulers as islamist movements born of the internal situation as well as of the international environment accuse them of un islamic behaviour 5 as argued by timur kuran by creating an institutional trap the legacy of the islamic classical system also makes institutional reforms more difficult to achieve

the siable law model of stock returns this study investigates the tail shapes of empirical distributions of returns on an extensive group of common stocks the tails of the return distributions are found to be thinner than those of infinite variance stable distributions therefore although homogeneity is evident in general economic and statistical inferences drawn from stable law parameters estimated from samples of stock returns may be misleading this is in spite of the apparent overall similarity in shape between empirical and stable distributions

learning and stock effects in environmental regulation the case of greenhouse gas emissions abstract this paper concerns the optimal regulation of greenhouse gases that lead to global climate change in particular we focus on uncertainty and learning which over time resolves uncertainty we present an empirical stochastic model of climate economy interactions and present results on the tension between postponing control until more is known vs acting now before irreversible climate change takes place uncertainty in our model is in the damage caused by global warming the results suggest that a temporary carbon tax may dominate a permanent one because a temporary tax may induce increased flexibility

volatility transmission and volatility impulse response functions in crude oil markets abstract using daily data from july 2005 to february 2011 for wti dubai and brent futures contracts we employ a var bekk model to investigate crude oil markets integration on the second moment we also quantify the size and persistence of these connections through the analysis of volatility impulse response functions virf for two historical shocks namely the 2008 financial crisis and the bp deepwater horizon oil spill we observe that brent and dubai crude are highly responsive to market shocks whereas wti crude shows the least responsiveness of the three benchmarks which creates questions about its predominance as a benchmark crude oil furthermore we fit the density of the virf at different forecast horizons these fitted distributions are asymmetric showing that the probability of observing a large impact of a shock is lower while the probability of a relatively smaller impact is much higher finally we simulate the virf for a given probability of a random shock the virf shows that only a large shock derived from a smaller probability will result in an increase in expected conditional volatilities these results provide useful insights into the volatility transmission mechanism in crude oil markets and their associated risk estimation and may have significant implications for various market participants and regulators

estimating oil price value at risk using the historical simulation approach abstract in this paper we propose using value at risk var for oil price risk quantification var provides an estimation for the maximum oil price change associated with a likelihood level and can be used for designing risk management strategies we analyse three var calculation methods the historical simulation standard approach the historical simulation with arma forecasts hsaf approach developed in this paper and the variance covariance method based on autoregressive conditional heteroskedasticity models forecasts the results obtained indicate that hsaf methodology provides a flexible var quantification which fits the continuous oil price movements well and provides an efficient risk quantification

interactions of corporate financing and investment decisions a dynamic framework this article analyzes the interaction between a firm s dynamic investment operating and financing decisions in a model with operating adjustment and recapitalization costs using numerical analysis we solve the model for cases that highlight interaction effects we find that higher production flexibility due to lower costs of shutting down and reopening a production facility enhances the firm s debt capacity thereby increasing the net tax shield value of debt financing while higher financial flexibility resulting from lower recapitalization costs has a similar effect production flexibility and financial flexibility are to some extent substitutes we find that the impact of debt financing on the firm s investment and operating decisions is economically insignificant

recovering an asset s implied pdf from option prices an application to crude oil during the gulf crisis we develop a general method for estimating the implied martingale equivalent probability density function pdf for futures prices from american options prices the early exercise feature of american options precludes expressing the price of the option in terms of the pdf there exist tight bounds for the price of american options in terms of the pdf we demonstrate how these bounds together with observed option prices can be used to estimate the parameters of the pdf we estimate the distribution for crude oil during the persian gulf crisis and find the distribution differs significantly from that recovered using standard techniques

the intensity and timing of investment the case of land the authors model the decision to replace durable capital when intensity is variable decisions of this type include land redevelopment decisions where the density of residential or commercial development is a choice variable as well as capital replacement decisions where capacity is variable the authors provide a general yet simple formation of the problem using an optimal stopping framework they characterize the value of the project the timing of investment and the intensity of development the authors show that intensity interacts in important ways with timing taxes and project values the ability to vary intensity raises hurdle rents and delays development decisions copyright 1994 by american economic association

wage distortion and resource allocation under uncertainty the effects of uncertainty on resource allocation have been examined in a two sector general equilibrium model of production constructing a model in which firms are risk indifferent and face uncertainty regarding the use of capital rothenberg and smith 9 considered the implications of uncertainty for welfare resource allocation and income distribution their model was refined by batra 3 to permit uncertainty in production to influence the firms decisions to hire both capital and labor batra s approach appears to be more general in that producers are assumed to be risk averse in lieu of risk neutral the writing of this paper is inspired by batra s contributions 2 3 batra s well known intermediate run equilibrium model is reformulated to allow for wage distortion utilizing the model several issues regarding the effects of changes in factor supplies in commodity prices and in the degree of wage distortion will be examined factor market distortions in the absence of uncertainty have been studied extensively in literature 2 their impacts on resource allocation in stochastic environment have not been explored however we argue that the introduction of the wage differential has a major impact on batra s results first relative value factor intensities generally replace relative physical factor intensities in determining signs of

the impact of spatial price differences on oil sands investments abstract in this article a two factor real options model is developed to examine the impact spatial price differences have on the value of an oil sands project and the incentive to invest large volatile price differences between locations can emerge when demand to ship exceeds capacity limits this may have a significant impact on production investment and policy in exporting regions here we assume the price difference between two locations follows a stationary process implying crude oil markets are integrated as oil prices in different locations move together the investment decision is formulated as a linear complementarity problem that is solved numerically using a fully implicit finite difference method results show the value of an oil sands project and the incentive to invest in a new project will increase when the mean price difference decreases surprisingly the standard deviation of the price difference has very little impact on project value or the incentive to invest

option valuation of claims on real assets the case of offshore petroleum leases this paper extends financial option theory by developing a methodology for the valuation of claims on a real asset an offshore petroleum lease several theoretical and practical problems not present in applying option pricing theory to financial assets are addressed most importantly we show the necessity of combining option pricing techniques with a model of equilibrium in the market for the underlying asset petroleum reserves the advantages of this approach over conventional discounted cash flow techniques are emphasized the methodological development provides important insights for both company behavior and government policy promising empirical results are reported

the economic impact of islam on developing countries summary this essay focuses on two questions how do the current economic systems and institutions of muslim countries differ from those of other countries at the same stage of economic development what is the impact of islam on the economic and social performance of these countries employing a cluster analysis i find that there is no special muslim economic system moreover few economic institutions are uniquely muslim using a regression analysis i also find that the presence of islam has relatively little influence on most economic or social performance indicators in the analysis of muslim economies religion does not appear to be a useful explanatory variable

supply chain optimization of petroleum organization under uncertainty in market demands and prices a multi period stochastic planning model has been developed and implemented for a supply chain network of a petroleum organization operating in an oil producing country under uncertain market conditions the proposed supply chain network consists of all activities related to crude oil production processing and distribution uncertainties were introduced in market demands and prices a deterministic optimization model was first developed and tested the impact of uncertainty on the supply chain was studied by performing a sensitivity analysis in which 20 deviations were introduced in market demands and prices of different commodities a stochastic formulation was then proposed which is based on the two stage problem with finite number of realizations the proposed stochastic programming approach proved to be quite effective in developing resilient production plans in light of high degree of uncertainty in market conditions the anticipated production plans have a considerably lower expected value of perfect information evpi the main conclusion of this study is that for an oil producing country with oil processing capabilities the impact of economic uncertainties may be tolerated by an appropriate balance between crude exports and processing capacities

evaluating density forecasts with applications to financial risk management density forecasting is increasingly more important and commonplace for example in financial risk management yet little attention has been given to the evaluation of density forecasts the authors develop a simple and operational framework for density forecast evaluation they illustrate the framework with a detailed application to density forecasting of asset returns in environments with time varying volatility finally the authors discuss several extensions copyright 1998 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

banks firms and the relative pricing of tax exempt and taxable bonds abstract the traditional analysis of the relative pricing of tax exempt and taxable debt is a habitat theory of the term structure of interest rates in the traditional analysis the preferences of investors for particular maturities of debt lead to unique pricing relations at every point on the yield curve which are indicative of investor marginal tax brackets recent work by fama 1977 suggests that banks are potential arbitrageurs across tax exempt and taxable bond markets which force a particular equilibrium on the pricing of short term bonds miller 1977 suggests that the choice of debt or equity financing by firms in the aggregate forces a similar equilibrium on the pricing of all tax exempt and taxable bonds this paper exploits the institution of regulation q and its effects on the banking system to bring evidence to bear on the predictions of these three models

optimal oil production and the world supply of oil abstract we study the optimal oil extraction strategy and the value of an oil field using a multiple real option approach the numerical method is flexible enough to solve a model with several state variables to discuss the effect of risk aversion and to take into account uncertainty in the size of reserves optimal extraction in the baseline model is found to be volatile if the oil producer is risk averse production is more stable but spare capacity is much higher than what is typically observed we show that decisions are very sensitive to expectations on the equilibrium oil price using a mean reverting model of the oil price where the equilibrium price is also a random variable oil production was cut during the 2008 2009 crisis and we find that the cut in production was larger for opec members for countries facing a lower discount rate and for countries whose governments finances are less dependent on oil revenues however the net present value of a country s oil reserves would be increased significantly by 100 in the most extreme case if production was cut completely when prices fall below the country s threshold price if several producers were to adopt such strategies world oil prices would be higher but more stable

fishing quota markets abstract in 1986 new zealand responded to the open access problem by establishing the world s largest individual transferable quota itq system using a 15 year panel dataset from new zealand that covers 33 species and more than 150 markets for fishing quotas we assess trends in market activity price dispersion and the fundamentals determining quota prices we find that market activity is sufficiently high in the economically important markets and that price dispersion has decreased we also find evidence of economically rational behavior through the relationship between quota lease and sale prices and fishing output and input prices ecological variability and market interest rates controlling for these factors our results show a greater increase in quota prices for fish stocks that faced significant reductions consistent with increased profitability due to rationalization overall this suggests that these markets are operating reasonably well implying that itqs can be effective instruments for efficient fisheries management

optimal tariff under domestic distortions abstract the purpose of this paper is to derive a generalized formula for a third best optimal tariff in the presence of domestic production distortions in a country in which tariff is the only available trade policy

uncertainty price stabilization and welfare foreign price instability can significantly affect the welfare of an open economy relying heavily on foreign trade for instance japan is vulnerable to oil price increases because 99 percent of its oil is imported similarly grain producers of many countries have advocated price stabilization and received protection from the risk of low foreign prices primary exporters are also concerned about foreign price instability because it contributes to export earnings instability recently itagaki 4 and beladi and samanta 1 investigated the issue of optimal tariff when international trade is subject to price instability their analyses suggest that trade restrictions can improve the welfare of an open economy when international trade is carried out under price uncertainty although the literature on price stabilization policies for a closed economy is extensive the implications of stabilization policies on an open economy facing foreign price instability have received little attention this paper investigates whether a domestic price stabilization policy can improve the welfare of an open economy facing foreign price instability the welfare effects of price stabilization on a closed economy were investigated by waugh 12 oi 8 massell 6 and newbery and stiglitz 7 1 among the contributions in this field gilbert s 3 work on the consequences of international price stabilization for an open economy represents an important advance over models using aggregate social surplus using approximations of welfare gains gilbert suggested that a risk averse country would benefit if the world price of a commodity were stabilized at the pre stabilization mean by an international intervention authority since a small country is a price taker it cannot neutralize price instability originating in the world market what is the optimal policy for a small open economy facing foreign price instability despite its well known optimality free trade is rarely practiced in small countries as evidenced by the common agricultural policy of the european economic community eec

estimation of value at risk for energy commodities via fat tailed garch models the choice of an appropriate distribution for return innovations is important in var applications owing to its ability to directly affect the estimation quality of the required quantiles this study investigates the influence of fat tailed innovation process on the performance of one day ahead var estimates using three garch models garch n garch t and garch ht daily spot prices of five energy commodities wti crude oil brent crude oil heating oil 2 propane and new york harbor conventional gasoline regular are used to compare the accuracy and efficiency of the var models empirical results suggest that for asset returns that exhibit leptokurtic and fat tailed features the var estimates generated by the garch ht models have good accuracy at both low and high confidence levels additionally mrsb indicates that the garch ht model is more efficient than alternatives for most cases at high confidence levels these findings suggest that the heavy tailed distribution is more suitable for energy commodities particularly var calculation

green supply chain design a mathematical modeling approach based on a multi objective optimization model abstract increasing levels of industrialization of developed nations associated with globalization trends have been creating new challenges to supply chain management scm for decades the main focus of scm has been on efficient ways of managing the flows through complex networks of supplier producers and customers more recently and as a result of the exponential increase of energy and materials consumption rates of energy and materials sustainable development arise as an urgent issue and new approaches to scm are required to incorporate environmental and economic concerns in the design of supply chains in this paper a new green supply chain gsc design approach has been proposed to deal with the trade offs between environmental and financial issues in order to reduce negative impacts on the environment caused by the increasing levels of industrialization the new approach incorporates a closed loop network to accommodate the reprocessing paradigm of disposal products and a multi objective optimization mathematical model to minimize overall costs and carbon dioxide emissions when setting the supply chain optimization process is performed using three scalarization approaches namely weighted sum method weighted tchebycheff and augmented weighted tchebycheff computational results are analyzed to identify the advantages and drawbacks of each approach the model was tested in a case study and results allowed to identify the capability of the model to deal with the trade offs between the costs and environmental issues as well as to identify its main limitation when addressing real size problems

the probability distribution of foreign exchange price changes tests of candidate processes this study investigates empirically candidate processes for characterizing foreign exchange price changes measured over limited horizons extant empirical studies find distributions of exchange returns too long tailed and leptokurtic to satisfy normality four processes are investigated here because of their potential to model o bserved discontinuities in exchange rates and nonstationary sample moments as well as their economic appeal the results favor a mixed jump model for all six major trading currencies tested copyright 1988 by mit press

the multidimensional effects of religion on socioeconomic development a review of the empirical literature religion plays a fundamental role in most people s lives with profound implications for socioeconomic development this survey provides a comprehensive and systematic overview of the causal mechanisms between religion and development discussed and tested in the economics literature and reviews quantitative empirical evidence on the actual effects of religion on economic and social dimensions of development we start by disaggregating the concept of religion into four religious dimensions and propose a framework to conceptualize causal mechanisms numerous mechanisms are possible but only a few uncontested findings exist religion is ambivalent vis a vis development although religious ideas can foster certain forms of human capital acquisition and labor market participation scholars have found a negative relationship between religious dimensions and both income and gender equality as well as innovation activities religious identity is also a source of labor market discrimination and has ambivalent effects on economic growth and social cohesion methodological challenges refer to the availability of fine grained data especially for developing countries the use of concepts and definitions and the lack of causal inference

irreversible investment real options and competition evidence from real estate development abstract we examine the extent to which uncertainty delays investment and the effect of competition on this relationship using a sample of 1214 condominium developments in vancouver canada built from 1979 1998 we find that increases in both idiosyncratic and systematic risk lead developers to delay new real estate investments empirically a one standard deviation increase in the return volatility reduces the probability of investment by 13 percent equivalent to a 9 percent decline in real prices increases in the number of potential competitors located near a project negate the negative relationship between idiosyncratic risk and development these results support models in which competition erodes option values and provide clear evidence for the real options framework over alternatives such as simple risk aversion

a real options based model and its application to china s overseas oil investment decisions abstract this paper applies real options theory to overseas oil investment by adding an investment environment factor to oil resource valuation a real options model is developed to illustrate how an investor country or oil company can evaluate and compare the critical value of oil resource investment in different countries under oil price exchange rate and investment environment uncertainties the aim is to establish a broad model that can be used by every oil investor country to value overseas oil resources the model developed here can match three key elements 1 deal with overseas investment the effects of investment environment and exchange rates 2 deal with oil investment oil price production decline rate and development cost etc 3 the comparability of the results from different countries different countries oil investment situation can be compared by using the option value index ovi china s overseas oil investment is taken as an example to explain the model by calculating each oil investee country s critical value per unit of oil reserves and examining the effect of different factors on the critical value the results show that the model developed here can provide useful advice for china s overseas oil investment program the research would probably also be helpful to other investor countries looking to invest in overseas oil resources

uncertainty domestic distortions and the optimal tariff a number of studies have appeared in recent years incorporating uncertainty in a two sector general equilibrium model of trade particularly noteworthy are the contributions by batra 1 and ingene and yu 4 283 95 among others 3 6 326 31 the literature on the optimal trade policies under domestic factor market distortion in a non stochastic framework is also vast 8 but there has not been any attempt to formulate optimal tariff policy in a stochastic model of international trade characterized by uncertain relative price and factor market distortion recently itagaki 5 292 97 has analyzed the issue of optimal tariff under relative price uncertainty but without any domestic distortions in this context he has shown that for a small open economy facing uncertain terms of trade the optimal tariff is not zero however the analysis of optimal trade policies under domestic distortion along with uncertain terms of trade is conspicuously absent this paper extends their analysis and derives a generalized formula for the optimal tariff in such an economy where a tariff is considered as the only available trade policy a thorough understanding of the optimal trade policies in the presence of domestic factor market distortion and uncertain terms of trade will be useful for many ldc s plagued by growing distortions in this paper we assume that producers maximize their profits and consumers maximize their utility after the import tariff is levied by the policymakers and both international and domestic prices have been observed and the policymakers take into account the behavior of the producers and consumers when they are choosing the optimal tariff rate in the next section the model is presented then we derive the optimal tariff formula for the economy with uncertain terms of trade in the presence of domestic factor market distortions section iii contains a summary and some concluding remarks

geology or economics testing models of irreversible investment using north sea oil data this paper tests the main implications of models of irreversible investment using data from operations in the oil fields in the north sea discrete time hazard regression models are used to ascertain the influence of economic variables the expected price of oil the variance of the price of oil and the level of reserves on the lag between the discovery of a field and the decision to develop the field we are able to control for heterogeneity in the data by incorporating variables which account for both the geological features of each field and individual operator characteristics the results indicate that the expected price of oil and the level of reserves are important in influencing the appraisal duration but that the variance of the oil price is not variables capturing the non economic features of the individual fields are also found to be significant factors affecting the appraisal lag copyright 1994 by royal economic society

u s oil and natural gas reserve prices 1982 2003 abstract a time series is estimated of in ground prices of u s oil and natural gas reserve prices for the period 1982 2003 using market transaction data reserves sold are considered as proved errors in this respect may affect estimates in either direction the data are also used to examine the impact of reserve status production rate and well head prices on reserve prices both oil and gas current values rose after 2000 in real terms the reserve value of oil rose sharply in 2003 but stayed below the 1985 peak that of gas remained below the mid 1980s oil reserve values hold for the worldwide industry gas values only for north america

competition and cooperation between supply chains in multi objective petroleum green supply chain a game theoretic approach petroleum supply chain is one of the most important and sophisticated managing missions in both developing and developed countries nowadays environmental pollution is another critical factor in designing the petroleum supply chain this importance encourages the governments to minimize the amount of environmental pollution and maximize their obtained profit simultaneously by enacting required legislations on the transportation modes and the refineries considering maximizing the job creation and each stakeholder s profit and minimizing the emission of co2 and other greenhouse gases at the same time is called sustainable petroleum supply chain which has been paid little attention despite its significance therefore the modelling of petroleum supply chain considering sustainability and pricing issues is investigated for the first time in this work and a sustainable competitive petroleum supply chain scpsc model is developed to minimize pollution while maximizing the profits and job creation this problem is a two level model the first level in scpsc is the competition between the supply chains of the government and the private sectors which is modelled by the game theory approach including nash and stackelberg equilibria the optimal price and demand for each supply chain determined in the first level are considered as the second level parameters in the second level the optimal values of the decisions in designing the petroleum supply chain will be obtained by solving mixed integer linear programming milp under the mentioned three objective functions finally the proposed model is applied to a real world case in the national iranian oil company nioc based on the results of the stackelberg equilibrium the government profits increase by 11 12 while that of the private sector decreases by 25 4 and 28 11 increasing in the government profit is due to increased demand provided by government the results show that the whole profit of the petroleum supply chain in nash equilibrium is 9 8 more than that in the stackelberg equilibrium

a duration model of irreversible oil investment theory and empirical evidence the aim of this paper is to analyse the implications of the theory of irreversible investment under uncertainty for investment in oil fields on the united kingdom continental shelf ukcs we consider the problem of an operator who owns a licence to develop and extract oil from a field of known capacity an intertemporal optimization model in discrete time is developed to derive decision rules for the timing of the irreversible development investment and for the optimal rate of extraction model simulation is then used to describe the properties of the numerical solutions the predictions of the theory on the determinants of the irreversible investment decision are then examined using statistical duration analysis data on the length of the time period between discovery and development are available for individual fields on the ukcs we measure the duration of the irreversible investment gestation lag for each field and test the model by assessing the significance of the theoretical variables in explaining the significance of such a lag both our theoretical model and our empirical results suggest the importance of a nonlinear interaction of the level of oil prices and the volatility of oil prices in determining the development lag the simulation of our theoretical model shows a nonlinear impact of oil price volatility on the trigger level of oil prices our empirical results suggest that the effect of price volatility is a function of the expected price level with increased price volatility having a positive impact on the duration of investment appraisal when expected prices are low and a negative impact when they are high

using the binomial model for the valuation of real options in computing optimal subsidies for chinese renewable energy investments abstract for the valuation and implementation of renewable energy investments the issue of providing private investors with a financial incentive to accelerate their investment is frequently a critical component we apply this principle to the chinese context this paper focuses on using the binomial model to compute the required subsidy that would incentivize investors to optimal immediate exercise of the american style option embedded at the launching phase of the projects for chinese renewable energy investments in addition this paper also aims at contrasting the binomial model with the more laborious monte carlo simulation previously used to evaluate the proper subsidy by using the same data but a different method and reducing the number of uncertain factors to one it is suggested these two methods have similar outcomes but the binomial method requires substantially less computation and is more self explanatory this paper thus provides government with an easy to implement alternative way to compute the required subsidy

asymmetry and uncertainty in capital formation an application to oil investment theories of irreversible investment suggest a negative relation between investment and uncertainty and nonlinear adjustment costs open for asymmetries in the adjustment of fixed capital we propose an econometric modelling approach to estimate and test the key predictions of modern investment theory including asymmetric dynamics and various uncertainty indicators our application on a data set from the oil industry offers empirical support for both asymmetric dynamics and uncertainty in oil and gas investment

time to build option value and investment decisions abstract investment decisions and outlays are often made sequentially for example the rate at which construction proceeds is usually flexible and can be adjusted with the arrival of new information traditional discounted cash flow methods which treat the pattern of investment as fixed ignore this flexibility and understate the value of the project this paper uses contingent claims analysis to derive optimal decision rules and to value such investments we determine the effects of time to build opportunity cost and uncertainty on the investment decision for reasonable parameter values we show how a simple npv rule can lead to gross errors

optimal crude oil procurement under fluctuating price in an oil refinery abstract in this paper we study the optimal procurement and operation of an oil refinery the crude oil prices follow geometric brownian motion processes with correlation we build a multiperiod inventory problem where each period involves an operation problem such as separation or blending the decisions are the amount of crude oils to purchase and the amount of oil products to produce we employ approximate dynamic programming methods to solve this multiperiod multiproduct optimization problem numerical results reveal that this complex problem can be approximately solved with little loss of optimality further we find that the approximate solution significantly outperforms a set of myopic policies that are currently used

stochastic dominance and uncertain price prospects since the seminal and simultaneous publications of hadar and russell 6 and hanoch and levy 8 there has been a virtual explosion of papers investigating implications of stochastic dominance rules for decisions under uncertainty dominance principles have important applications to portfolio choice capital budgeting and financial intermediation stochastic dominance can also be applied to investment and production decision problems under uncertainty in these areas both overall and marginal impacts of uncertainty have received wide attention 2 the emphasis in consumer welfare analysis under uncertainty has been on the ranking of different price prospects ranking of price prospects is more complicated than that of income prospects for two related reasons first due to differences in ordinal preferences among consumers the second degree stochastic dominance rule on price prospects does not yield a unanimous ranking among risk averse consumers thus waugh 17 massell 12 and samuelson 14 have focused on the ranking of price prospects for a single consumer or consumers with identical ordinal preferences second there is no a priori reason for income risk averse consumers to exhibit aversion to fair price risks specifically the indirect utility function of an income risk averse consumer is neither concave nor convex in prices indirect ways of comparing consumer welfare under alternative price prospects via expected consumer surplus expected compensating variation or expected equivalent variation have thus been investigated in the literature expected consumer surplus ecs has been particularly popular for ranking certain and uncertain price prospects 3 however turnovsky shalit and schmitz 16 showed that the ranking

financial risk management in the planning of refinery operations abstract most models for refinery planning are deterministic that is they use nominal parameter values without considering the uncertainty this paper addresses the issue of uncertainty and studies the financial risk aspects the problem addressed here is that of determining the crude to purchase and decide on the production level of different products given forecasts of demands the profit is maximized taking into account revenues crude oil costs inventory costs and cost of unsatisfied demand the model developed in this paper was tested using data from the refinery owned by the bangchak petroleum public company limited thailand the results show that the stochastic model can suggest a solution with higher expected profit and lower risk than the one suggested by the deterministic model

estimating the cost savings and avoided co2 emissions in brazil by implementing energy efficient policies abstract investing more in renewable energy sources and using this in a rational and efficient way is vital for the sustainable growth of world energy efficiency ee will play an increasingly important role in future generations the aim of this work is to estimate how much the pnef national plan for energy efficiency launched by the brazilian government in 2011 will save over the next 5 years by avoiding the construction of additional power plants as well as the amount of the co2 emission the marginal operating cost is computed for medium term planning of the dispatching of power plants in the hydro thermal system using stochastic dynamic dual programming after incorporating stochastic energy efficiencies into the demand for electricity we demonstrate that even for a modest improvement in energy efficiency 1 in the optimistic scenario by comparison the new belo monte hydro electric plant will cost r 26 billion to be repaid over a 30 year period i e r 867 million in 5 years so in brazil ee policies are preferable to building a new power plant