analytical evaluation of volatility forecasts estimation and forecasting for realistic continuous time stochastic volatility models is hampered by the lack of closed form expressions for the likelihood in response andersen bollerslev diebold and labys econometrica 71 2003 579 625 advocate forecasting integrated volatility via reduced form models for the realized volatility constructed by summing high frequency squared returns building on the eigenfunction stochastic volatility models we present analytical expressions for the forecast efficiency associated with this reduced form approach as a function of sampling frequency for popular models like garch multifactor affine and lognormal diffusions the reduced form procedures perform remarkably well relative to the optimal infeasible forecasts

option pricing when the variance changes randomly theory estimation and an application in this paper we examine the pricing of european call options on stocks that have vari ance rates that change randomly we study continuous time diffusion processes for the stock return and the standard deviation parameter and we find that one must use the stock and two options to form a riskless hedge the riskless hedge does not lead to a unique option pricing function because the random standard deviation is not a traded security one must appeal to an equilibrium asset pricing model to derive a unique option pricing function in general the option price depends on the risk premium associated with the random standard deviation we find that the problem can be simplified by assuming that volatility risk can be diversified away and that changes in volatility are uncorrelated with the stock return the resulting solution is an integral ofthe black scholes formula and the distribution function for the variance of the stock price we show that accurate option prices can be computed via monte carlo simulations and we apply the model to a set of actual prices

a cross country analysis of aggregate energy and carbon intensities abstract an update on the study by ang energy economics 9 1987 274 286 shows substantial changes in the relationship between energy consumption and national output across world countries from 1975 to 1997 while the ratio of commercial energy consumption to national output increases across countries as per capita income increases in 1975 the converse is observed in 1997 the cross country energy elasticity has also dropped from values well above unity to below or close to unity using the 1997 data the relationship between co 2 emissions and national output across countries is studied and the results show some interesting differences from that between energy consumption and national output

answering the skeptics yes standard volatility models do provide accurate forecasts a voluminous literature has emerged for modeling the temporal dependencies in financial market volatility using arch and stochastic volatility models while most of these studies have documented highly significant in sample parameter estimates and pronounced intertemporal volatility persistence traditional ex post forecast evaluation criteria suggest that the models provide seemingly poor volatility forecasts contrary to this contention we show that volatility models produce strikingly accurate interdaily forecasts for the latent volatility factor that would be of interest in most financial applications new methods for improved ex post interdaily volatility measurements based on high frequency intradaily data are also discussed

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

approximate option valuation for arbitrary stochastic processes abstract we show how a given probability distribution can be approximated by an arbitrary distribution in terms of a series expansion involving second and higher moments this theoretical development is specialized to the problem of option valuation where the underlying security distribution if not lognormal can be approximated by a lognormally distributed random variable the resulting option price is expressed as the sum of a black scholes price plus adjustment terms which depend on the second and higher moments of the underlying security stochastic process this approach permits the impact on the option price of skewness and kurtosis of the underlying stock s distribution to be evaluated

the pricing of options on assets with stochastic volatilities one option pricing problem that has hitherto been unsolved is the pricing of a european call on an asset that has a stochastic volatility this paper examines this problem the option price is determined in series form for the case in which the stochastic volatility is independent of the stock price numerical solutions are also produced for the case in which the volatility is correlated with the stock price it is found that the black scholes price frequently overprices options and that the degree of overpricing increases with the time to maturity one option pricing problem that has hitherto remained unsolved is the pricing of a european call on a stock that has a stochastic volatility from the work of merton 12 garman 6 and cox ingersoll and ross 3 the differential equation that the option must satisfy is known the solution of this differential equation is independent of risk preferences if a the volatility is a traded asset or b the volatility is uncorrelated with aggregate consumption if either of these conditions holds the risk neutral valuation arguments of cox and ross 4 can be used in a straightfoward way this paper produces a solution in series form for the situation in which the stock price is instantaneously uncorrelated with the volatility we do not assume that the volatility is a traded asset also a constant correlation between the instantaneous rate of change of the volatility and the rate of change of aggregate consumption can be accommodated the option price is lower than the blackscholes b s 1 price when the option is close to being at the money and higher when it is deep in or deep out of the money the exercise prices for which overpricing by b s takes place are within about ten percent of the security price this is the range of exercise prices over which most option trading takes place so we may in general expect the b s price to overprice options this effect is exaggerated as the time to maturity increases one of the most surprising implications of this is that if the b s equation is used to determine the implied volatility of a near the money option the longer the time to maturity the lower the implied volatility numerical solutions for the case in which the volatility is correlated with the stock price are also examined the stochastic volatility problem has been examined by merton 13 geske 7 johnson 10 johnson and shanno 11 eisenberg 5 wiggins 16 and

valuation of power options under heston s stochastic volatility model abstract we derive semi analytic solutions for power option prices under the heston model specifically the pricing formula is shown to be valid whenever the power of the underlying asset price has a finite moment unlike the majority of stochastic volatility models there remains a significant problem to check the existence of moments of assets prices of order higher than one fortunately the moment explosion property under the heston model is examined systematically in andersen and piterbarg 2000 incorporating with their results we present explicit formulas for moment generating function of log price and for power option prices under the circumstances when the corresponding moments are finite in case that the corresponding moment explodes we provide two numerical methods to derive prices of power put and capped power call options in spite of a simple idea numerical examples show that the approximations are extremely accurate and efficient

displaced diffusion option pricing this paper develops a new option pricing formula that pushes the underlying source of risk back to the risk of individual assets of the firm the formula simultaneously encompasses differential riskiness of the assets of the firm their relative weights in determining the value of the firm the effects of firm debt and the effects of a dividend policy with both constant and random components although this setting considerably generalizes the black scholes 1 analysis it nonetheless produces a formula via riskless arbitrage arguments that given estimated inputs is as easy to use as the black scholes formula

information time option pricing theory and empirical evidence abstract with a stochastic time change from calendar time to information time we derive a parsimonious option pricing formula with stochastic volatility as a risk neutral poisson sum of merton s 1973 prices over the option s information time maturity domain the formula contains two unobservable parameters information arrival intensity and information time asset volatility with stochastic volatility induced by random information arrival when the information arrival rate intensifies the option price increases and vice versa we test the formula in pricing hedging and excess profits capture empirically using currency and the s p 500 futures options transaction data

energy intensity a new look energy intensity is compared among different countries by dividing their energy use by their gross domestic product gdp in dollar terms gdp us being a varying monetary value will have different meaning in different countries because of the varying means of converting it into dollars therefore distorted results of energy intensity are obtained the newly devised concept of presenting gdp in terms of purchasing power parity in dollars us ppp goes a long way to solving this distortion it also allows the energy intensity of developing countries to be presented in a more favourable way

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

the energy intensity of transition countries the economies of central and eastern europe and the former soviet union have traditionally been very energy intensive energy intensity defined as energy use per gdp has decreased in the course of transition but progress has been uneven and most transition countries still use several times as much energy per unit of output as their western peers this paper decomposes energy data to identify the main factors behind the improvements in energy intensity it shows that energy prices and progress in enterprise restructuring are the two most important drivers for more efficient energy use

environmental relevance and use of energy indicators in environmental management and research this thesis aim is to develop an approach for scoping of environmental aspects regarding the material use in a large organisation in order to contribute to a strategic environmental management the study object is the swedish national rail authority the transport sector is closely linked to the environmental pressures caused by our society consequently a lot of studies have been made regarding the contribution from different transport sectors however the bulk of these studies concerns only the transports and thus omits the environmental pressures from the material use needed to support these sectors i e building and maintaining the infrastructure the rail transport sector is generally conceived to be the most environmentally adapted land transport mode however this notion commonly only includes environmental pressures from the traffic phase the method uses material related energy use and co2 emissions as a proxy to environmental pressures from material use furthermore the robustness of the method is tested by the use of scenarios and sensitivity analysis in particular the environmental relevance of the energy indicator is studied the approach developed in this thesis can be used to introduce new perspectives such as upstream environmental pressures to an organisation s environmental management it can be employed to identify hot spots in an organisation s material use consequently this new knowledge can be used to influence the design of new products to set environmental demands for purchasing and to focus further environmental analyses of the hot spots the approach can also be used to broaden the perspectives in for instance environmental impact assessments strategic environmental assessment and environmental reviews in the studied rail building project 3 products constituted 99 5 weight of the total material use these products were steel rails concrete ties and ballast materials they share the common characteristics of being noncomplex non toxic and made out of very few materials

converging to a common pattern of energy use in developing and industrialized countries abstract the evolution of the energy intensity paths in the period 1971 to 1992 shows developing and industrialized countries converging to a common pattern of energy use this trend becomes evident when using the gross domestic product of each country expressed in purchasing power parity in constant us dollars developing countries have been reluctant to make commitments under the kyoto protocol as they oppose any measure to reduce greenhouse gas emissions that might constrain their economic development however the use of the energy intensity indicator can be an alternative measure preserving the economic development while reducing greenhouse gas emissions for the fulfillment of the kyoto protocol goals

stochastic volatility option pricing this paper examines alternative methods for pricing options when the underlying security volatility is stochastic we show that when there is no correlation between innovations in security price and volatility the characteristic function of the average variance of the price process plays a pivotal role it may be used to simplify fourier option pricing techniques and to implement simple power series methods we compare these methods for the alternative mean reverting stochastic volatility models introduced by stein and stein 1991 and heston 1993 we also examine the biases in the black scholes model that are eliminated by allowing for stochastic volatility and we correct some errors in the stein and stein 1991 analysis of this issue empirical evidence on underlying asset prices and on their derivatives strongly suggests that asset price volatility is stochastic the pricing of options under this condition is therefore an important problem in this paper we study alternative option pricing methods that account for stochastic volatility we are particularly concerned with power series methods which we show to be quite accurate and easy to implement for alternative volatility specifications we point out their relation with recently proposed exact methods this permits a precise assessment of the approximation involved in the simple power series approach and of the impact of stochastic volatility on option prices following garman 1976 stochastic volatility option prices must satisfy a bivariate fundamental partial differential equation pde in the two state variables security price and volatility since volatility is not spanned by assets in the econ omy the volatility risk may not be eliminated by arbitrage methods therefore its market price explicitly enters into the pde the associated risk premium is owen graduate school of management vanderbilt university nashville tn 37203 and universita di siena facolta di scienza economiche e bancarie 53100 siena italy respectively part of this research was supported from a grant from the dean s fund and the financial markets research center at the owen school of management vanderbilt university some of this research was completed while roma was visiting the anderson graduate school of management ofthe university of california at los angeles we thank participants of the finance accounting and economics workshop at the owen school of management vanderbilt university for useful comments we appreciate the suggestions of roger huang craig lewis ron masulis and walter torous we thank joanne ball for editorial

common factors and local factors implications for term structures and exchange rates this paper studies a multi factor two country term structure and exchange rate model when a diversification effect for an international bond portfolio is expected it shows that the diversification gain calls upon certain restrictions on the process of the stochastic discount factor in a factor structured economy existence of local factors is shown to be a necessary condition for the gains from investing in foreign bonds further the exchange rate risk premia are shown to be a function of the differentials of the risk premia of the factors in bond returns empirical results reveal the tendency for investors to respond sensitively to rare shocks which is shown to be a potential solution to the forward premium puzzle

comparison of energy intensities in european union countries results of a structural decomposition analysis abstract this work proposes an input output structural decomposition analysis model to identify the sources of the differences in the energetic intensities of the european union countries given an economic structure a determined composition of the final demand and determined direct energy intensities by countries the work studies to what extent these factors explain the difference in aggregate energy intensities that are observed for different european union countries on the basis of this information indicators are constructed by sectors and countries that allow us to identify the role that each sector or country plays as an energy consumer the results show that the aggregate total energy differences in europe are strongly influenced by the direct energy intensity effect and by the demand effect without the different economic structures of the countries being an important factor in the explanation of these differences the metallurgical and manufacturing products sectors are identified as the most intensive in the aggregate energy intensity

an intertemporal general equilibrium model of asset prices this paper develops a continuous time general equilibrium model of a simple but complete economy and uses it to examine the behavior of asset prices in this model asset prices and their stochastic properties are determined endogenously one principal result is a partial differential equation which asset prices must satisfy the solution of this equation gives the equilibrium price of any asset in terms of the underlying real variables in the economy in this paper we develop a general equilibrium asset pricing model for use in applied research an important feature of the model is its integration of real and financial markets among other things the model endogenously determines the stochastic process followed by the equilibrium price of any financial asset and shows how this process depends on the underlying real variables the model is fully consistent with rational expectations and maximizing behavior on the part of all agents our framework is general enough to include many of the fundamental forces affecting asset markets yet it is tractable enough to be specialized easily to produce specific testable results furthermore the model can be extended in a number of straightforward ways consequently it is well suited to a wide variety of applications for example in a companion paper cox ingersoll and ross 7 we use the model to develop a theory of the term structure of interest rates many studies have been concerned with various aspects of asset pricing under uncertainty the most relevant to our work are the important papers on intertemporal asset pricing by merton 19 and lucas 16 working in a continuous time framework merton derives a relationship among the equilibrium expected rates of return on assets he shows that when investment opportunities are changing randomly over time this relationship will include effects which have no analogue in a static one period model lucas considers an economy with homogeneous individuals and a single consumption good which is produced by a number of processes the random output of these processes is exogenously determined and perishable assets are defined as claims to all or a part of the output of a process and the equilibrium determines the asset prices our theory draws on some elements of both of these papers like merton we formulate our model in continuous time and make full use of the analytical tractability that this affords the economic structure of our model is somewhat similar to that of lucas however we include both endogenous production and

option valuation and hedging strategies with jumps in the volatility of asset returns we develop a model in which the volatility of risky assets is subject to random and discontinuous shifts over time we derive prices of claims contingent on such assets and analyze options based trading strategies to hedge against the risk of jumps in the return volatility unsystematic and systematic events such as takeovers major changes in business plans or shifts in economic policy regimes may drastically alter firms risk profiles our model captures the effect of such events on options markets lumpy arrival of information has long been recognized as a phenomenon of considerable importance in financial markets following merton 1976 1 much of the literature on contingent claims valuation under discontinuous information arrival has studied the case where jumps occur in asset values in this article we model the discontinuous resolution of uncertainty in a new way we allow for the volatility of an asset s return to change randomly and discretely we then derive and analyze valuation equations for claims contingent on such an asset we also show how certain traded options together with the underlying stock and a riskless bond can be used to insure against jumps in the volatility of an asset s returns stock price movements in our model fluctuate randomly between low and high volatility regimes discontinuous changes in the volatility of stock prices may be a result of significant changes in a firm s operating and financial structure its competitive environment or its corporate plan reorganizations caused by takeovers and mergers may also occasion such volatility shifts changes in uncertainty in our model could also be systematic and a result of aggregate supply shocks or shifts in economic policies and political regimes our model can also be interpreted as a model of a market where from time to time firms face the release of an important piece of information that may affect their stock prices significantly the market participants may be aware

a hybrid stock trading system using genetic network programming and mean conditional value at risk abstract this paper describes a hybrid stock trading system based on genetic network programming gnp and mean conditional value at risk model gnp cvar the proposed method combining the advantages of evolutionary algorithms and statistical model has provided useful tools to construct portfolios and generate effective stock trading strategies for investors with different risk attitudes simulation results on five stock indices show that model based on gnp and maximum sharpe ratio portfolio performs the best in bull market and that based on gnp and the global minimum risk portfolio performs the best in bear market the portfolios constructed by markowitz s mean variance model performs the same as mean cvar model it is clarified that the proposed system significantly improves the function and efficiency of original gnp which can help investors make profitable decisions

the pricing of stock index options in a general equilibrium model this paper analyzes the pricing of stock index options in a simple general equilibrium model in this model the volatility of the stock index and the spot rate of interest are functions of a stochastic variable the paper investigates the biases that arise when using the black scholes model with the assumed volatility and interest rate dynamics it is shown that the model can in principle explain the biases observed in empirical work on stock index options

inequality of energy intensities across oecd countries a note abstract this paper proposes the use of theil s second measure to analyze international energy intensity differences this index allows differences to be broken down within and between groups of countries in a consistent manner an analysis of oecd countries for the period 1971 1999 shows some basic points first the fall in energy intensities differences is attributable both to within group and between group inequality components second between group inequalities are currently the main contributor to the whole inequality value finally a detailed exploration on within group inequalities reveals the significant explanatory role played by eu countries

china s ongoing energy efficiency drive origins progress and prospects abstract in 2004 china s government launched a vigorous programme to reverse the trend of rising national energy intensity and to reduce intensity by 20 over the period 2006 2010 the aim of this paper is to examine this programme in the context of nearly 30 years of measures to enhance energy efficiency in china and thus to evaluate the likelihood that today s policies will yield improvements over a longer period the country achieved a sustained decline of energy intensity in the period 1980 2001 but this trend was reversed in 2002 this reversal arose from a shift in the structure of the economy to more energy intensive industries and from a decline in the rate of technical innovation the measures taken since 2003 have been directed principally at energy intensive industries but have also addressed other sectors of the economy though the energy intensity target for the year 2010 may be achieved greater efforts will be needed to address a number of constraints which include the reluctance to use economic and financial instruments the dependency of energy policy on industrial and social policies the nature of political decision making and of public administration a shortage of skills and social attitudes to energy

negative net foreign asset positions and stability in a world portfolio balance model abstract negative net foreign asset positions have been associated with a troublesome stability problem in flexible exchange rate regimes in this paper a symmetrically specified two country portfolio balance model is employed to provide some perspective on this problem it is concluded that negative net foreign asset positions do not constitute an independent source of instability instability can arise only under nonrational expectations or because of destabilizing speculation

the risk premium of volatility implicit in currency options this article provides an empirical investigation of the risk neutral variance process and the market price of variance risk implied in the foreign currency options market there are three principal contributions first the parameters of heston s mean reverting square root stochastic volatility model are estimated using dollar mark option prices from 1987 to 1992 second it is shown that these implied parameters can be combined with historical moments of the dollar mark exchange rate to deduce an estimate of the market price of variance risk these estimates are found to be nonzero time varying and of sufficient magnitude to imply that the compensation for variance risk is a significant component of the risk premia in the currency market finally the out of sample test suggests that the historical variance and the hull and white implied variance contain no more information than that imbedded in the heston implied variance

calculating economy wide energy intensity decline rate the role of sectoral output and energy shares abstract we specify formulas for computing the rate of decline in economy wide energy intensity by aggregating its two determinants technical efficiency improvements in the various sectors of the economy and shifts in economic activity among these sectors the formulas incorporate the interdependence between sectoral shares and establish a one to one relation between sectoral output and energy shares this helps to eliminate future energy intensity decline scenarios which involve implausible values of either sectoral share an illustrative application of the formulas is provided using within sector efficiency improvement estimates suggested by lightfoot green and harvey

small dimension pde for discrete asian options abstract this paper presents an efficient method for pricing discrete asian options in presence of smile and non proportional dividends using an homogeneity property we show how to reduce an n 0 dimensional problem to a one or two dimensional one we examine different numerical specifications of our dimension reduced pde using a crank nicholson method interpolation method grid boundaries time and space steps as well as the extension to the case of non proportional discrete dividends using a jump condition we benchmark our results with quasi monte carlo simulation and a multi dimensional pde

output effects of a tariff under flexible exchange rates abstract a tariff s impact on output is shown to depend on the asset market structure if foreigners do not hold the domestic asset as is generally assumed in the previous literature the tariff induced current account surplus creates a large enough currency appreciation that demand for domestic output falls when foreigners hold the domestic asset the current account surplus results in an international transfer of assets which allows a smaller currency appreciation the more similar are asset preferences across countries the smaller is the appreciation and therefore the greater is the likelihood that domestic output will increase

three types of decline in energy intensity an explanation for the decline of energy intensity in some developing countries this study proposes a hypothesis that there are three types of decline in energy intensity and one of the declines in energy intensity may be due to the restricted utilization of combustible renewables and wastes this study uses this hypothesis to explain the decline of energy intensity in some developing countries finally a model for sustainable energy consumption is suggested

option pricing when the variance is changing the monte carlo method is used to solve for the price of a call when the variance is changing stochastically

causality between energy consumption and economic growth in india a note on conflicting results abstract this note examines the different direction of causal relation between energy consumption and economic growth in india applying engle granger cointegration approach combined with the standard granger causality test on indian data for the period 1950 1996 we find that bi directional causality exists between energy consumption and economic growth further we apply johansen multivariate cointegration technique on the different set of variables the same direction of causality exists between energy consumption and economic growth this is different from the results obtained in earlier studies

polices for increasing energy efficiency thirty years of experience in oecd countries energy efficiency improvement was an important phenomenon in the global energy balance over the past 30 years without energy efficiency improvements the oecd nations would have used approximately 49 more energy than was actually consumed as of 1998 this paper first reviews energy intensity trends for the major oecd nations since 1973 considering how much of the overall reduction in e gdp was due to energy efficiency improvement and how much was due to structural change the bulk of the paper examines the energy efficiency policies and programs adopted in japan united states and western europe commenting on their effectiveness and energy savings impacts where possible the paper also reviews the energy efficiency policies and programs adopted in california this experience shows that well designed policies can result in substantial energy savings as demonstrated in the united states where nine specific policies and programs reduced primary energy use in 2002 by approximately 11 substantial energy savings also occurred in japan some european countries and in the electricity sector in california

on the number of state variables in options pricing in this paper we investigate the methodological issue of determining the number of state variables required for options pricing after showing the inadequacy of the principal component analysis approach which is commonly used in the literature we adopt a nonparametric regression technique with nonlinear principal components extracted from the implied volatilities of various moneyness and maturities as proxies for the transformed state variables the methodology is applied to the prices of s p 500 index options from the period 1996 2005 we find that in addition to the index value itself two state variables approximated by the first two nonlinear principal components are adequate for pricing the index options and fitting the data in both time series and cross sections

the energy intensity in lithuania during 1995 2009 a lmdi approach abstract the measurement assessment and effective mitigation of energy intensity compose a foremost objective of contemporary energy policy although the european union eu member states have been experiencing the convergence in energy efficiency indicators lithuania acceded to the eu in 2004 still remains peculiar with relatively high energy intensity our study therefore is aimed at analyzing the energy intensity trends in lithuanian economy as a whole as well as in separate economic sectors the investigation covers the period of 1995 2009 the logarithmic mean divisia index was applied for decomposition analysis our analysis has shown that energy efficiency falls during economic downturn in order to facilitate these challenges the lithuanian government as well as business should opt for increasing energy efficiency in the most problematic sectors of transport and services in addition the analysis of legal acts namely national energy efficiency programme for 2006 2010 and energy efficiency action plan for 2010 2016 was taken into consideration some suggestions thus were offered for successful implementation of strategic goals outlined in the aforementioned strategic documents

a dynamic model of tariffs output and employment under flexible exchange rates abstract a portfolio balance model of the open economy with imperfectly flexible wages and rational expectations is used to analyze the macroeconomic effects of commercial policy previous analyses have led to the counterintuitive and almost inconceivable conclusion that under flexible exchange rates a tariff is contractionary by considering a tariff in a dynamic setting and focusing on the process of adjustment it is shown that there may exist a tradeoff between a tariffs short run and long run effects in certain circumstances a tariff imposed under flexible exchange rates increases output and employment initially while reducing them subsequently

hedging options under transaction costs and stochastic volatility in this paper we consider the problem of hedging contingent claims on a stock under transaction costs and stochastic volatility extensive research has clearly demonstrated that the volatility of most stocks is not constant over time as small changes of the volatility can have a major impact on the value of contingent claims hedging strategies should try to eliminate this volatility risk we propose a stochastic optimization model for hedging contingent claims that takes into account the effects of stochastic volatility transaction costs and trading restrictions simulation results show that our approach could improve performance considerably compared to traditional hedging strategies

methodological proposal for territorial distribution of the percentage reduction in gross inland energy consumption according to the eu energy policy strategic goal abstract a 20 reduction in the consumption of energy is one of the main goals of the european union s eu 20 20 20 energy strategy but the uniform application of this overall goal to all of the countries is neither fair nor equitable as it does not take into consideration the characteristics of the energy system in each member state this article therefore proposes a nonlinear distribution methodology with objective dynamic goals for reducing gross inland energy consumption according to the context and characteristics of each member state we hope it will open discussion on how these overall goals can be weighted then we analyse the situation of the energy indicators related to energy efficiency in the reference year 2005 used by the eu for reaching its goal of reducing the gross inland consumption by 20 by 2020 and its progress from 1996 to 2007 finally the methodology proposed is applied to the year 2020 on the nuts0 territorial level that is to members of the eu according to the eurostat nomenclature of territorial units for statistics nuts weighting is done based on energy intensity per capita gross inland consumption and per capita energy intensity in two scenarios the eu 15 and eu 27

option values under stochastic volatility theory and empirical estimates abstract this paper numerically solves the call option valuation problem given a fairly general continuous stochastic process for return volatility statistical estimators for volatility process parameters are derived and parameter estimates are calculated for several individual stocks and indices the resulting estimated option values do not differ dramatically from black scholes values in most cases although there is some evidence that for longer maturity index options black scholes overvalues out of the money calls in relation to in the money calls

variances of security price returns based on high low and closing prices in a recent paper garman and klass 1980 studied the problem of estimating capital asset price volatility parameters developing an idea first introduced by parkinson 1980 they argue that improved volatility measures can be obtained by taking into account the daily high low and opening prices in addition to the traditionally used closing prices this paper is concerned mainly with testing the empirical validity of different volatility estimators based on high low and closing prices

option arbitrage and strategy with large price changes abstract arbitrage pricing theorems are derived for options on stocks with jumps as a well as local movements the resulting valuation formulas depend on observable variables only closed form valuation expressions are obtained in the case of large positive and negative jumps these results translate into a simple algebra for characterizing the risk of arbitrage and investment portfolios a continuous time formulation of the infinite variance hypothesis leads to isomorphic pricing expressions

trade liberalization in general equilibrium intertemporal and inter industry effects this paper uses a dynamic computable general equilibrium model to simulate the effects of unilateral reductions by the u s in tariffs and voluntary export restraints ver s we consider 50 percent cuts in tariffs and in ad valorem ver equivalents separately and in combination the model features intertemporal optimization by households and firms explicit adjustment dynamics an integrated treatment of the current and capital accounts of the balance of payments and industry disaggregation central findings include 1 ver s are considerably more significant than tariffs in terms of the magnitude of the macroeconomic effects induced by their reduction 2 while ver reductions enhance domestic welfare unilateral tariff cuts reduce domestic welfare as a consequence of u s monopsony power and associated adverse terms of trade effects 3 international capital movements critically regulate the responses of the u s and foreign economies to these trade initiatives and produce significant differences between short and long run effects and 4 effects differ substantially across industries together these findings indicate that simulation analyses that disregard international capital movements adjustment dynamics and industry differences may generate seriously misleading results

valuation of american futures options theory and empirical tests this paper reviews the theory of futures option pricing and tests the valuation principles on transaction prices from the s p 500 equity futures option market the american futures option valuation equations are shown to generate mispricing errors which are systematically related to the degree the option is in the money and to the option s time to expiration the models are also shown to generate abnormal risk adjusted rates of return after transaction costs the joint hypothesis that the american futures option pricing models are correctly specified and that the s p 500 futures option market is efficient is refuted at least for the sample period january 28 1983 through december 30 1983 futures option contracts now trade on every major futures exchange and on a wide variety of underlying futures contracts the chicago mercantile exchange the chicago board of trade the new york futures exchange and the commodity exchange now collectively have more than twenty options written on futures contracts where the underlying spot commodities are financial assets such as stock portfolios bonds notes and eurodollars foreign currencies such as west german marks swiss francs and british pounds precious metals such as gold and silver livestock commodities such as cattle and hogs and agricultural commodities such as corn and soybeans moreover new contract applications are before the commodity futures trading commission and should be actively trading in the near future with the markets for these new contingent claims becoming increasingly active it is appropriate that the fundamentals of futures option valuation be reviewed and tested black 5 provides a framework for the analysis of commodity futures options although his work is explicitly directed at pricing european options on forward contracts it applies to european futures contracts as well if the riskless rate of interest is constant during the futures option life 1 the options currently

option pricing and implicit volatilities abstract this paper demonstrates that black scholes implied volatilities can be used to value options in many situations where the assumptions of the black scholes model are violated including i alternative stock processes ii stochastic interest rates and iii market frictions given its computational simplicity this procedure provides an attractive alternative to the more complex models with a direct estimation procedure

a risk reserve model for hedging in incomplete markets abstract this paper presents a new approach to the pricing and hedging problem for contingent claims in incomplete markets we assume that traders wish to maximize the expected final payoff of the hedging portfolio and the claims and we avoid the use of utility functions instead we model how traders are punished when taking excessive risks in practice to do so we introduce an extra reserve bank account which earns a smaller rate of return than a standard deposit bank account the reserve account should always contain a minimal amount of money which depends on the risk that the trader s portfolio is exposed to we focus on a specific example which uses option price sensitivities the greeks to specify the risk the resulting optimization problem can then be solved in a rather explicit form and we show how the solution naturally leads to bid ask spreads prices which depend on the trader s current position and implied volatility smiles

a bayesian approach to modeling stock return volatility for option valuation new measures of stock return volatility are developed to increase the precision of stock option price estimates with bayesian statistical methods volatility estimates for a given stock are developed using prior information on the cross sectional patterns in return volatil ities for groups of stocks sorted on size financial leverage and trading volume call option values computed with the bayesian procedure generally improve prediction accuracy for market prices of call options relative to those computed using implied volatility standard historical volatility or even the actual ex post volatility that occurred during each option s life although the bayesian methods produce biased call price estimators they do reduce the systematic tendency of standard pricing approaches to overprice underprice options on high low volatility stocks little bias improvement is observed with respect to the time to maturity and moneyness of the call options

energy saving and energy efficiency concepts for policy making departing from the concept of rational use of energy the paper outlines the microeconomics of end use energy saving as a result of frugality or efficiency measures frugality refers to the behaviour that is aimed at energy conservation and with efficiency we refer to the technical ratio between energy input and output services that can be modified with technical improvements e g technology substitution changing behaviour from one side and technology from the other are key issues for public energy policy in this paper we attempt to identify the effects of parameters that determine energy saving behaviour with the use of the microeconomic theory the role of these parameters is crucial and can determine the outcome of energy efficiency policies therefore policymakers should properly address them when designing policies

hedging derivative securities and incomplete markets an e arbitrage approach given a european derivative security with an arbitrary payoff function and a corresponding set of underlying securities on which the derivative security is based we solve the optimal replication problem find a self financing dynamic portfolio strategy involving only the underlying securities that most closely approximates the payoff function at maturity by applying stochastic dynamic programming to the minimization of a mean squared error loss function under markov state dynamics we derive recursive expressions for the optimal replication strategy that are readily implemented in practice the approximation error or e of the optimal replication strategy is also given recursively and may be used to quantify the degree of market incompleteness to investigate the practical significance of these e arbitrage strategies we consider several numerical examples including path dependent options and options on assets with stochastic volatility and jumps