regime switching in the reactions of stock markets in saudi arabia to oil price variations the study revisits the stock oil nexus by examining the reactions of equity markets to oil price shocks at national and sectoral levels for saudi arabia in a time varying framework by employing the markov switching egarch model developed by henry 2009 journal of banking and finance 33 405 based on weekly data the findings reveal that the behaviour of all stock markets switches between an expansion regime and a recession regime with more persistence for the expansion state additionally influential international events associated with stock market drops are clearly identified in the recession regime furthermore there is evidence of asymmetric reactions of the equity index returns and the probabilities of transition from one state to another to oil price variations with heterogeneous impacts across sectors and regimes the stock markets are more sensitive to oil price decreases than to oil price increases although the evidence of relatively slight differences in some findings across weekdays the study allows investors and policymakers to understand well the interactions of stock sector markets vis a vis the world oil market in a regime switching framework in order to make the right decision as regards portfolio diversification and regulation of the stock markets

the federal reserve s new operating procedures a post mortem abstract although money stock targeting has been the strategic focus of federal reserve policy since the mid 1970 s operating policy the tactics whereby the longer run strategy is implemented over short term intervals has been changed by the federal reserve at least twice over this period a particularly dramatic change in operating policy was announced by the federal reserve in october 1979 this paper provides empirical evidence that settles questions about the nature of this change and suggests that the new operating procedures may have contributed to the heightened interest rate volatility experienced over the 1979 to 1982 period

economy wide estimates of the implications of climate change sea level rise the economy wide implications of sea level rise in 2050 are estimated using a static computable general equilibrium model this allows for a better estimate of the welfare effects of sea level rise than the common direct cost estimates and for an estimate of the impact of sea level rise on greenhouse gas emissions overall general equilibrium effects increase the welfare costs of sea level rise but not necessarily in every sector or region in the absence of coastal protection economies that rely most on agriculture are hit hardest although energy is substituted for land overall energy consumption falls with the shrinking economy hurting energy exporters with full coastal protection gdp increases particularly in regions with substantial dike building but utility falls least in regions that protect their coasts and export energy energy prices rise and energy consumption falls the costs of full protection exceed the costs of losing land the results also show direct costs the usual method for estimating welfare changes due to sea level rise are a bad approximation of the general equilibrium welfare effects previous estimates of the economic impact of sea level rise are therefore biased

assessing the employment impacts of environmental and natural resource policy this paper provides an introductory guide for environmental andresource economists to methods of assessing the impact of environmentaland natural resource policy on employment it examines five basicapproaches to evaluating the effect of a policy action on employment 1 supply and demand analysis of the affected sector 2 partialequilibrium analysis of multiple markets 3 fixed price generalequilibrium simulations input output i o and social accounting matrix sam multiplier models 4 non linear general equilibriumsimulations computable general equilibrium cge models and 5 econometric estimation of the adjustment process particularly timeseries analysis the basic modeling structure and data requirementsfor each of these approaches are described simple examples of theirapplication to evaluation of environmental and natural resourcepolicy are developed and the relative merits and applicability of each are discussed

a bivariate markov regime switching garch approach to estimate time varying minimum variance hedge ratios this article develops a new bivariate markov regime switching bekk generalized autoregressive conditional heteroscedasticity garch rs bekk garch model the model is a state dependent bivariate bekk garch model and an extension of gray s univariate generalized regime switching grs model to the bivariate case to solve the path dependency problem inherent in the bivariate regime switching bekk garch model we propose a recombining method for the covariance term in the conditional variance covariance matrix the model is applied to estimate time varying minimum variance hedge ratios for corn and nickel spot and futures prices out of sample point estimates of hedging portfolio variance show that compared to the state independent bekk garch model the rs bekk garch model improves out of sample hedging effectiveness for both corn and nickel data we perform white s 2000 data snooping reality check to test for predictive superiority of rs bekk garch over the benchmark model and find that the difference

afforestation and timber management compliance strategies in climate policy a computable general equilibrium analysis abstract this paper analyzes the role of forest based carbon sequestration in a unilateral eu27 emissions reduction policy under a global computable general equilibrium cge framework forestry mitigation is introduced into the model relying on carbon sequestration curves provided by a global forestry model the structure of the original cge is extended to consider land use change and timber supply effects resulting from the use of forest sinks to reduce carbon emissions results show that afforestation and timber management could lead to substantially lower policy costs by using forest carbon sinks it is possible to achieve the 30 emissions reduction target with an additional european effort of only 0 2 of gdp compared with the cost of a 20 emissions reduction without forestry carbon price is also reduced by approximately 30 in 2020 european forest carbon sequestration may have however the perverse effect of increasing timber production in areas of the world which already have high deforestation rates a sensitivity analysis on main parameters confirms the robustness of our results

on jumps in common stock prices and their impact on call option pricing the black scholes call option pricing model exhibits systematic empirical biases the merton call option pricing model which explicitly admits jumps in the underlying security return process may potentially eliminate these biases we provide statistical evidence consistent with the existence of lognormally distributed jumps in a majority of the daily returns of a sample of nyse listed common stocks however we find no operationally significant differences between the black scholes and merton model prices of the call options written on the sampled common stocks

climate change costs recent advancements in the economic assessment climate change is unique among the consequences of fossil fuel burning in its far reaching impact both spatially and temporally earlier studies estimate the aggregated monetized damage due to climate change at 1 5 to 2 0 of world gdp for 2 co2 the oecd would lose 1 0 to 1 5 of gdp the developing countries 2 0 to 9 0 according to these estimates these figures are not comprehensive and highly uncertain newer studies increasingly emphasize adaptation variability extreme events other non climate change stress factors and the need for integrated assessment of damages as a result differences in impacts between regions and sectors have increased the market impacts in developed countries tended to fall and non market impacts have become increasingly important marginal damages are more interesting from a policy point of view earlier estimates range from about us 5 to us 125 per tonne of carbon with most estimates at the lower end of this range these figures are based on polynomial functions in the level of climate change but the rate of change may be equally important as are the speed of adaptation restoration and value adjustment furthermore future vulnerability to climate change will be different from current vulnerability on the whole the market impacts fall relatively with economic growth while the non market impacts rise relatively with growth

estimates of the economic effects of sea level rise regional estimates of direct cost dc are commonly used to measure the economic damages of sea level rise such estimates suffer from three limitations i values of threatened endowments are not well known ii loss of endowments does not affect consumer prices and iii international trade is disregarded results in this paper indicate that these limitations can significantly affect economic assessments of sea level rise current uncertainty regarding endowment values as reflected in two alternative data sets for example leads to a 17 percent difference in coastal protec tion a 36 percent difference in the amount of land protected and a 36 percent difference in dc globally also global losses in equivalent variation ev a welfare measure that accounts for price changes are 13 percent higher than dc estimates regional ev losses may be up to 10 percent lower than regional dc however because international trade tends to redistribute losses from regions with relatively high damages to regions with relatively low damages

volatility persistence and stock valuations some empirical evidence using garch summary in this paper issues of volatility persistence and the changing risk premium in the stock market are investigated using the garch estimation technique we get a point estimate of the index of relative risk aversion of 4 5 and confirm the existence of changing equity premiums in the us during 1962 1985 the persistence of shocks to the stock return volatility is so high that the data cannot reject a non stationary volatility process specification the results of this paper are consistent with malkiel and pindyck s hypothesis that it is the unforseen rise ini the investment uncertainty during 1974 that causes the market to plunge

changes in regime and the term structure a note abstract in a recent paper in this journal james hamilton 1988 argues that anomalous behaviour of interest rate data in the u s can be accommodated within the expectations model if allowance is made for the possibility of stochastic changes of regime but close examination of his data reveals that an inappropriate series for the yield on ten year bonds was used with more appropriate data his finding of a switch of regime over the period 1979 1982 appears to be robust the stochastic regime switching model however is no longer able to reconcile this data with the expectations model of the term structure

estimation of the optimal futures hedge standard approaches to designing a futures hedge often suffer from two major problems first they focus only on minimizing risk so no account is taken of the impact on expected return second in estima ting the hedge ratio no allowance is made for time variation in the distribution of cash and futures price changes this paper describes a technique for estimating the optimal futures hedge that corrects these problems and illustrates its use in hedging treasury bonds with t bond futures copyright 1988 by mit press

regime switching correlation hedging this paper investigates the hedging effectiveness of commodity futures when the correlations of spot and futures returns are subject to multi state regime shifts an independent switching dynamic conditional correlation garch is dcc which is free from the problems of path dependency and recombining is applied to model multi regime switching correlations the results of hedging exercises indicate that state dependent is dcc outperforms state independent dcc garch and three state is dcc exhibits superior hedging effectiveness illustrating importance of modeling higher state switching correlations for dynamic futures hedging

economic costs and impacts of climate induced sea level rise and storm surge in canadian coastal provinces a cge approach abstractwe estimated the economic costs and impacts of future sea level rise slr and storm surge due to climate change in canada s coastal provinces using regional dynamic computable general equilibrium models that track provincial welfare gdp trade prices and inputs over the 2009 2054 period we also assessed the economic costs of coastal adaptation investments to determine whether such investments can be justified on economic grounds results indicated that slr and storm surge could cost canada in the range of 4 6 25 5 billion in present value welfare and between 53 7 and 108 7 billion in present value gdp we found significant variation in costs and impacts across coastal provinces with some provinces such as newfoundland and labrador experiencing only marginal costs impacts and others such as british columbia experiencing costs as high as 21 billion in welfare over the period coastal adaptation investments were supported on economics grounds overall this study provides the first and

on jump processes in the foreign exchange and stock markets exchange rates exhibit systematic discontinuities even after allowingfor conditional heteroskedasticity in the diffusion process the results are much more significant in theforeign exchange market than in the stock market which suggests differences in the structure of these markets finally this jump component is shown to explain some of the empirically observed mispricings in the currency options market the objective of this article is to analyze and compare the empirical distribution of returns in the stock market and in the foreign exchange market there are a number of reasons why a better understanding of the stochastic processes driving prices in these markets would be useful many financial models rely heavily on the assumption of a particular stochastic process while relatively little attention is paid to the empirical fit of the postulated distribution as a result models like option pricing models are applied indiscriminately to various markets such as the stock market and the foreign exchange market when the underlying processes may be fundamentally different the foreign exchange market for instance is characterized by active exchange rate man

a markov model of heteroskedasticity risk and learning in the stock market abstract we examine a variety of models in which the variance of a portfolio s excess return depends on a state variable generated by a first order markov process a model in which the state is known to economic agents is estimated it suggests that the mean excess return moves inversely with the level of risk we then estimate a model in which agents are uncertain of the state the estimates indicate that agents are consistently surprised by high variance periods so there is a negative correlation between movements in volatility and in excess returns

rational expectations econometric analysis of changes in regime an investigation of the term structure of interest rates abstract this paper is of interest both for its methodological contribution of new tools for analyzing rational expectations models and for its substantive conclusions concerning the term structure of interest rates during the monetary experiment of october 1979 the paper studies systems subject to changes in regime interpreted here as occasional discrete shifts in the parameters governing the time series behavior of exogenous economic variables the specification is shown to be quite tractable both theoretically and empirically the technique is used to analyze yields on three month treasury bills and ten year treasury bonds during 1962 to 1987 a constant parameter linear model for short term rates is shown to be inconsistent both with the univariate time series properties of short rates and with the observed bivariate relation between long and short rates under the expectations hypothesis of the term structure an alternative nonlinear model that admits the possibility of changes in regime affords a much better description of the univariate process for short rates moreover the cross equation restrictions implied by the expectations hypothesis of the term structure are consistent with the nonlinear specification indeed the residuals of the restricted relation have a standard error of only 0 8 basis points this is a third less than that of a completely unrestricted linear regression of long rates on short rates and compares with an unconditional standard deviation of long rates of 142 basis points i conclude that once the recognition by bond traders of changes in regime is taken into account the expectations hypothesis of the term structure of interest rates holds up fairly well for these data

testing for real effects of monetary policy regime shifts the rational expectations revolution in macroeconomics has forced economists to think about macroeconomic policy in terms of alternative policy rules or regimes huizinga and mishkin 1986 for example have argued recently that monetary policy has important effects on the ex ante real rate of interest and as evidence they cite apparent changes in the stochastic properties of the real rate coinciding with major shifts in monetary policy regimes more specifically they claim that in the post war period the real rate process in the united states shifted in october 1979 the month the fed changed operating procedures and in october 1982 when the fed deemphasized monetary aggregates mishkin 1986 has argued that these results suggest monetary policy not fiscal deficits bears responsibility for high u s real interest rates in the early 1980s because an understanding of the impact of monetary policy shifts on real interest rates is important for many issues in macroeconomics suggested methods for detecting real rate shifts deserve careful scrutiny the method employed by huizinga and mishkin 1986 tests for shifts in a projection equation of the expost real rate on a set of information variables such as the nominal interest rate and past inflation this projection equation approach is straightforward to apply and therefore potentially of use in testing a variety of macroeconomic hypotheses such as the neutrality of money for the projection equation approach to be valid it is desirable that it exhibit shifts if and only if the true real rate generating process has shifted the purpose of this paper is to show that changes in the real rate process while sufficient to

a markov model of switching regime arch in this article i present a new approach to model more realistically the variability of financial time series i develop a markov arch model that incorporates the features of both hamilton s switching regime model and engle s autoregressive conditional heteroscedasticity arch model to examine the issue of volatility persistence in the monthly excess returns of the three month treasury bill the issue can be resolved by taking into account occasional shifts in the asymptotic variance of the markov arch process that cause the spurious persistence of the volatility process i identify two periods during which there is a regime shift the 1974 2 1974 8 period associated with the oil shock and the 1979 9 1982 8 period associated with the federal reserve s policy change the variance approached asymptotically in these two episodes is more than 10 times as high as the asymptotic variance for the remainder of the sample i conclude that regime shifts have a greater impact on the properties of the data and i ca

mean reversion in equilibrium asset prices this paper demonstrates that negative serial correlation in long horizon stock returns is consistent with an equilibrium model of asset pricing when investors display only a moderate desire to smooth their consumption commonly used measures of mean reversion in stock prices calculated from historical returns data nearly always lie within a 60 percent confidence interval of the median of the monte carlo distributions implied by the authors equilibrium model from this evidence the authors conclude that the degree of serial correlation in the data could plausibly have been generated by their model copyright 1990 by american economic association

persistence in variance structural change and the garch model this article examines the persistence of the variance as measured by the generalized autoregressive conditional heteroskedasticity garch model in stock return data in particular we investigate the extent to which persistence in variance may be overstated because of the existence of and failure to take account of deterministic structural shifts in the model both an analysis of daily stock return data and a monte carlo simulation experiment confirm the hypothesis that garch measures of persistence in variance are sensitive to this type of model misspecification

long and short term interest rates in a risky world abstract the paper develops and tests a general equilibrium model in which variability or risk affects the choice of portfolios our measures of variability include only the variability of unanticipated growth in monetary and non monetary aggregates and our tests use data ending with the change in federal reserve procedures in october 1979 we find that increased variability of unanticipated money growth raises demands for debt and money and reduces the demand for real capital interest rates on both short and long term debt rise by a risk premium we estimate the size of the risk premium before and after the october 1979 change and we show that the change in federal reserve procedures moved the economy to a less efficient point

diaspora and development jagdish bhagwati s proposal for a brains tax to be levied on the incomes of the diaspora from developing countries residing in the developed countries and the proceeds to be remitted to the countries of origin of the diaspora is well known in recent years the voluntary contributions or remittances from the diaspora to their countries of origin have often been higher than the aid monies given to these countries it is now increasingly recognised that the diaspora may have an active role to play in the development process of their countries of origin they are not only a source of funds they are also a rich source of skills and know how this paper analyses the potential of the diaspora as agents of change in their countries of origin and argues that the social rate of return to a unit of diaspora investments may be higher than that for a unit of foreign direct investment from non diaspora sources