ambiguous volatility and asset pricing in continuous time we formulate a model of utility for a continuous time framework that captures aversion to ambiguity about both volatility and drift corresponding extensions of some basic results in asset pricing theory are presented first we derive arbitrage free pricing rules based on hedging arguments because ambiguous volatility implies market incompleteness hedging arguments determine prices only up to intervals in order to obtain sharper predictions we apply the model of utility to a representative agent endowment economy and study equilibrium asset returns a version of the consumption capital asset pricing model is derived and the effects of ambiguous volatility are described the author 2013 published by oxford university press on behalf of the society for financial studies all rights reserved for permissions please e mail journals permissions oup com oxford university press

moral hazard in dynamic risk management we consider a contracting problem in which a principal hires an agent to manage a risky project when the agent chooses volatility components of the output process and the principal observes the output continuously the principal can compute the quadratic variation of the output but not the individual components this leads to moral hazard with respect to the risk choices of the agent to find the optimal contract we develop a novel approach to solving principal agent problems first we identify a family of admissible contracts for which the optimal agent s action is explicitly characterized then we show that we do not lose on generality when finding the optimal contract inside this family up to integrability conditions to do this we use the recent theory of singular changes of measures for ito processes we solve the problem in the case of cara preferences and show that the optimal contract is linear in these factors the contractible sources of risk including the output the quadratic variation of the output and the cross variations between the output and the contractible risk sources thus like sample sharpe ratios used in practice path dependent contracts naturally arise when there is moral hazard with respect to risk management in a numerical example we show that the loss of efficiency can be significant if the principal does not use the quadratic variation component of the optimal contract

a combined sustainability index for electricity efficiency measures abstract one of the most substantial tools that serve decision makers in their efforts to reduce greenhouse gas emissions includes energy efficiency measures that in most cases benefit from governmental assistance for achieving electricity consumption reduction goals this paper examines five energy efficiency measures defining a combined sustainability index a multi criteria analysis of five predefined indices was developed economic environmental technology social and political providing a combined index for each measure and a tool for identifying the preferred measure within a specific situation based on its total sustainability score in this research a case study was conducted and the preferred measure was found to be municipal street lighting systems based on its high political and social scores and its relatively high installation potential the second choice would be replacement of chillers in the industrial sector and the least favorable measure is the replacement of water pumps in the water sector the methodology described brings into account the technological specifications of the measure implemented and the specific national conditions under which it is implemented

sustainability assessment of electricity generation technologies using weighted multi criteria decision analysis abstract solving the issue of environmental degradation due to the expansion of the world s energy demand requires a balanced approach the aim of this paper is to comprehensively rank a large number of electricity generation technologies based on their compatibility with the sustainable development of the industry the study is based on a set of 10 sustainability indicators which provide a life cycle analysis of the plants the technologies are ranked using a weighted sum multi attribute utility method the indicator weights were established through a survey of 62 academics from the fields of energy and environmental science our results show that large hydroelectric projects are the most sustainable technology type followed by small hydro onshore wind and solar photovoltaic we argue that political leaders should have a more structured and strategic approach in implementing sustainable energy policies and this type of research can provide arguments to support such decisions

sovereign spreads in the eurozone which prospects for a eurobond in this paper we provide new evidence on the determinants of sovereign yield spreads and market sentiment effects in the eurozone in order to evaluate the rationale for a common eurobond jointly guaranteed by eurozone member states we find that default risk is the main driver of yield spreads suggesting small gains from greater liquidity fiscal fundamentals matter in the pricing of default risk but only as they interact with other countries yield spreads that is with the global risk that the market perceives more importantly the impact of this global risk variable is not constant over time a clear sign of contagion driven by shifts in market sentiment this evidence points to a discontinuity in the disciplinary role of financial markets if markets can stay irrational longer than a country can stay solvent then the role of yield spreads on national bonds as a fiscal discipline device is considerably weakened and issuing eurobonds can be economically justified carlo favero and alessandro missale

dynamic resource allocation with hidden volatility abstract we study a firm s internal resource allocation using a dynamic principal agent model with endogenous cash flow volatility the principal supplies the agent with resources for productive use but the agent has private control over both project volatility and resource intensity and may misallocate resources to obtain private benefits the optimal contract can yield either overly risky or overly prudent project selection it can be implemented with a constant pricing schedule i e a static decentralized linear mechanism giving the agent control over the resource quantities project risk and agent s equity share the implementation rationalizes the use of hurdle rates above a firm s cost of capital and transfer prices above marginal cost while showing that hurdle rates or transfer prices may not vary with the agent s risk choice

dynamics of contract design with screening we analyze a novel principal agent problem of moral hazard and adverse selection in continuous time the constant private shock revealed at time 0 when the agent selects the contract has a long term impact on the optimal contract the latter is based not only on the continuation value of the agent who truthfully reports but is also contingent upon the continuation value of the agent who misreports called the temptation value the good agent is retired when the temptation value of the bad agent becomes large because then it is expensive to motivate the good agent the bad agent is retired when the temptation value of the good agent becomes small because then the future payment does not provide sufficient incentives we also compare the efficiency of the shutdown contract and the screening contract and find that the screening contract can bring more profit to the principal only when the agent s reservation utility is sufficiently small this paper was accepted by wei xiong finance

excessive deficits sense and nonsense in the treaty of maastricht maastricht s fiscal rules willem buiter giancarlo corsetti and nouriel roubini the maastricht treaty on economic and monetary union in the ec has specified limits on both government debt and fiscal deficits satisfying these criteria is necessary for getting into emu once inside violating these limits will also incur penalties the fiscal requirements especially the debt criterion are much tougher than is required to ensure public sector solvency trying to attain these targets will force the ec initially into substantial deflation and recession failure to correct for real growth inflation and the business cycle makes the nominal deficit a poor basis for any policy or target ambiguity about how fiscal targets will in fact be interpreted might provide a way out but cannot today be relied upon to do so supranational fiscal rules are sometimes claimed to be justified by externalities in national fiscal policies we find this justification wanting both in theory and empirically a better case might be built on the imposition of external commitments to offset domestic political distortions that systematically induce excessive deficits even so we conclude that the fiscal convergence criteria on balance are harmful and should be disregarded or applied very loosely to avoid the risk of serious fiscal overkill

optimization of energy required and greenhouse gas emissions analysis for orange producers using data envelopment analysis approach abstract data envelopment analysis is a non parametric method for multi criteria decision and performance measurement this approach has two models including constant returns to scale and variable returns to scale model the main objective of this study was to analyze the efficiency of orchardists discriminate efficient orchardists from inefficient ones and identify wasteful uses of energy using data envelopment analysis for orange production in guilan province of iran also another purpose of this paper was to determine greenhouse gas emissions for efficient and inefficient orange producers this method was used based on single output of orange yield and seven energy inputs including human labor machinery diesel fuel chemical fertilizers farmyard manure chemical and electricity the technical pure technical scale and cross efficiencies were calculated for orange orchardists using ccr and bcc models the results indicated that out of the total number of orchardists the share of efficient and inefficient units were 73 3 and 26 7 based on bcc model respectively also the results revealed the average of technical pure technical and scale efficiencies of orchardists were 0 894 0 965 and 0 922 respectively energy saving for target ratio was calculated about 13 for orange production in guilan province of iran the energy use efficiency energy productivity and net energy were improved by 14 7 14 4 and 15 4 using optimization of energy the results illustrated the difference of greenhouse gas emissions between efficient and inefficient units it was calculated about 19 6 also the electricity has the highest difference of greenhouse gas emissions between efficient and inefficient orchardists for orange production generally the application of data envelopment analysis method can improve energy efficiency and ghg emissions in orange production significantly

reforming israel s electricity sector abstract this paper analyzes the regulatory structure of the electricity sector in israel which is currently dominated by the government owned integrated utility israel electric corporation iec the current structure of a price cap with a mandatory rate reduction of 2 per year and a target return on equity roe of 6 5 is not sustainable because of iec s deteriorating financial health caused by the substantial investments it made to meet the 7 2 per year electricity demand growth in the past decade which has led to an exceptionally low realized roe of 3 4 for that period the investment trend will continue thanks to the 4 5 per year gdp growth projected for the next 10 20 years part of our proposed remedy is performance based regulation pbr implemented via a a price cap formula that will restore iec s financial health and offer iec downward pricing flexibility b changes in how iec compensates its workers and c a sliding scale plan that provides incentives for iec to become more efficient and to share risk with its customers we augment the pbr proposal by recommending changes in iec s tariffs and resource procurement procedures that aim to promote the development of a competitive power industry in the next 10 15 years

optimal risk sharing with effort and project choice we consider first best risk sharing problems in which the agent can control both the drift effort choice and the volatility of the underlying process project selection in a model of delegated portfolio management it is optimal to compensate the manager with an option type payoff where the functional form of the option is obtained as a solution to an ordinary differential equation in the general case the optimal contract is a fixed point of a functional that connects the agent s and the principal s maximization problems we apply martingale duality methods familiar from optimal consumption investment problems

a multi criteria evaluation of policy instruments for climate change mitigation in the power generation sector of trinidad and tobago even as small island developing states sids like trinidad and tobago t t increase industrialization and grapple with the challenges of increased pollution few studies provide guidance to policy makers of such countries on appropriate policy measures and instruments that can be implemented to mitigate greenhouse gas emissions here we apply a multi criteria evaluation methodology to ascertain preferences for policy measures and instruments in the power generation sector four broad policy measures and twelve policy instruments are assessed on criteria of environmental performance feasibility of implementation and political acceptability this method proves useful in t t since typical to many sids the intensive data required by other policy assessment methods is unavailable results indicate little difference in preference among the four policy measures thereby indicating that a multi pronged approach on several policy fronts is required the most preferred policy instruments to operationalize measures included provision of subsidies for energy saving technologies creating an industry wide carbon trading scheme and implementing a feed in tariff to increase the use of renewable energy sources this study therefore provides specific insights for policy makers in trinidad and tobago while also providing power generation sector specific guidance to other rapidly industrializing small island developing states

the fiscal cost implications of an accommodating approach to banking crises abstract in recent decades a majority of countries have experienced a systemic banking crisis requiring a major and expensive overhaul of their banking system budgetary outlays whether immediate or deferred have exceeded 50 of gdp in some cases this paper uses cross country econometric evidence to examine whether the design of crisis containment and resolution policies can systematically influence the overall magnitude of fiscal costs we find that accommodating policies such as blanket deposit guarantees open ended liquidity support repeated partial recapitalizations debtor bail outs and regulatory forbearance all tend to add significantly and sizably to fiscal costs

mexican energy policy and sustainability indicators abstract the authors analyze the mexican energy policy taking as reference the methodological framework for sustainable energy development proposed by the economic commission for latin america and the caribbean this methodology takes eight related indicators to the social environmental and economic dimensions in order to calculate a general sustainability indicator for the energy sector in this methodology the weight of each dimension is different namely the social and environmental issues have less relevance than the economic issues the authors use this methodology because government institutions as the department of energy and the department of environment and natural resources have used some indicators from such a methodology to propose plans programs projects and bills authors know of the existence of other methodologies about sustainability nonetheless opting for the economic commission for latin america and the caribbean s methodology is convenient because this organization is a respectable authority for civil servants from the mexican institutions our objective is just to contrast the sustainability grade of the energy sector between 1990 and 2008 for mexico whose government started reforms in the 1990s it concludes that those reforms did not bring about a higher sustainability level for the energy sector

the european sovereign debt crisis the origin and propagation of the european sovereign debt crisis can be attributed to the flawed original design of the euro in particular there was an incomplete understanding of the fragility of a monetary union under crisis conditions especially in the absence of banking union and other european level buffer mechanisms moreover the inherent messiness involved in proposing and implementing incremental multicountry crisis management responses on the fly has been an important destabilizing factor throughout the crisis after diagnosing the situation we consider reforms that might improve the resilience of the euro area to future fiscal shocks

the greek financial crisis growing imbalances and sovereign spreads abstract we discuss the origins of the greek financial crisis as manifested in the growing fiscal and current account deficits since euro area entry in 2001 we then extend a model typically used to explain risk premia to assess the extent to which credit ratings captured these premia next we estimate a cointegrating relationship between spreads and their long term fundamental determinants and compare the spreads predicted by this estimated relationship with actual spreads we find that spreads were significantly below what would be predicted by fundamentals from end 2004 up to the middle of 2005 by contrast since may 2010 actual spreads have exceeded predicted spreads by some 400 basis points

asset pricing under optimal contracts we consider the problem of finding equilibrium asset prices in a financial market in which a portfolio manager agent invests on behalf of an investor principal who compensates the manager with an optimal contract we extend a model from buffa vayanos and woolley 2014 by allowing general contracts and by allowing the portfolio manager to invest privately in individual risky assets or the index to alleviate the effect of moral hazard agent is optimally compensated by benchmarking to the index which however may incentivize him to be too much of a closet indexer to counter those incentives the optimal contract rewards agent for taking specific risk of individual assets in excess of the systematic risk of the index by rewarding the deviation between the portfolio return and the return of an index portfolio and the deviation s quadratic variation

aggregation and linearity in the provision of intertemporal incentives we consider the problem of providing incentives over time for an agent with constant absolute risk aversion the optimal compensation scheme is found to be a linear function of a vector of n accounts which count the number of times that each of the n kinds of observable events occurs the number n is independent of the number of time periods so the accounts may entail substantial aggregation in a continuous time version of the problem the agent controls the drift rate of a vector of accounts that is subject to frequent small random fluctuations the solution is as if the problem were the static one in which the agent controls only the mean of a multivariate normal distribution and the principal is constrained to use a linear compensation rule if the principal can observe only coarser linear aggregates such as revenues costs or profits the optimal compensation scheme is then a linear function of those aggregates the combination of exponential utility normal distributions and linear compensation schemes makes computations and comparative statics easy to do as we illustrate we interpret our linearity results as deriving in part from the richness of the agent s strategy space which makes it possible for the agent to undermine and exploit complicated nonlinear functions of the accounting aggregates

optimal contracts in a continuous time delegated portfolio management problem this article studies the contracting problem between an individual investor and a professional portfolio manager in a continuous time principal agent framework optimal contracts are obtained in closed form these contracts are of a symmetric form and suggest that a portfolio manager should receive a fixed fee a fraction of the total assets under management plus a bonus or a penalty depending upon the portfolio s excess return relative to a benchmark portfolio the appropriate benchmark portfolio is an active index that contains risky assets where the number of shares invested in each asset can vary over time rather than a passive index in which the number of shares invested in each asset remains constant over time fund managers compensation schemes in a delegated portfolio management setting have been of special interest to both academics and practitioners academic interest stems in part from the rapid growth of managed funds over the last two decades gompers and metrick 1998 report that by december 1996 mutual funds pension funds and other financial intermediaries held discretional control over more than half of the u s equity market it is thus of importance to study the impact of institutional trading on asset prices and to integrate into one model both asset pricing and delegated portfolio management compensation as advocated by brennan 1993 allen and santomero 1997 and allen 2001 it is also important to understand the relationship between a manager s trading strategies and his implicit incentives or career concerns see e g brown harlow and starks 1996 brown goetzmann and park 1997 chevalier and ellison 1999 and chen and pennacchi 2000 these concerns include internal promotion from a small to a large fund higher outside offers and the flow of money through the fund under management 1 the importance of fund manager compensation is also underscored by congressional passage in 1970 of the amendment to

a continuous time version of the principal agent problem this paper describes a new continuous time principal agent model in which the output is a diffusion process with drift determined by the agent s unobserved effort the risk averse agent receives consumption continuously the optimal contract based on the agent s continuation value as a state variable is computed by a new method using a differential equation during employment the output path stochastically drives the agent s continuation value until it reaches a point that triggers retirement quitting replacement or promotion the paper explores how the dynamics of the agent s wages and effort as well as the optimal mix of short term and long term incentives depend on the contractual environment the understanding of dynamic incentives is central in economics how do companies motivate their workers through piece rates bonuses and promotions how is income inequality connected with productivity investment and economic growth how do financial contracts and capital structure give incentives to the managers of a corporation the methods and results of this paper provide important insights to many such questions this paper introduces a continuous time principal agent model that focuses on the dynamic properties of optimal incentive provision we identify factors that make the agent s wages increase or decrease over time we examine the degree to which current and future outcomes motivate the agent we provide conditions under which the agent eventually reaches retirement in the optimal contract we also investigate how the costs of creating incentives and the dynamic properties of the optimal contract depend on the contractual environment the agent s outside options the difficulty of replacing the agent and the opportunities for promotion our new dynamic insights are possible due to the technical advantages of continuous time methods over the traditional discrete time ones continuous time leads to a much simpler computational procedure to find the optimal contract by solving an ordinary differential equation this equation highlights the factors that determine optimal consumption and effort the dynamics of the agent s career path are naturally described by the drift and volatility of the agent s pay offs the geometry of solutions to the differential equation allows for easy comparisons to see how the agent s wages effort and incentives depend on the contractual environment finally continuous time highlights many essential features of the optimal contract including the agent s eventual retirement in our benchmark model a risk averse agent is tied to a risk neutral principal forever after employment starts the agent influences output by his continuous unobservable effort input the principal sees only the output a brownian motion with a drift that depends on the agent s effort the agent dislikes effort and enjoys consumption we assume that the agent s utility function has the income effect that is as the agent s income increases it becomes costlier to compensate him for the effort also we assume that the agent s utility of consumption is bounded from below

linearity with project selection and controllable diffusion rate in continuous time principal agent problems i extend holmstrom and milgrom s model by allowing the agent to control privately or publicly the diffusion rate process and show that the optimal contract is still linear i discuss the conditions under which conflicts over the choice of diffusion rate do and do not arise as an application i examine project selection problems of a firm conflicts between the manager and investors arise because giving the manager too much incentive to work to increase the profit from ongoing operations can induce him to be too conservative in project selection possibly resulting in optimal contracts with low sensitivities

fiscal cyclicality and emu abstract for the set of emu member countries we examine cyclical patterns in fiscal outcomes we find that there is significant time variation in fiscal cyclicality with an improvement in the wake of the maastricht treaty but a deterioration after the creation of emu furthermore we show that the fiscal cycle is affected by the financial cycle in addition to the output cycle the lessons for the current reforms of european economic and fiscal governance are manifest

the eurozone crisis how banks and sovereigns came to be joined at the hip the eurozone sovereign and banking crisis evolved in three phases following the onset of the subprime tremors in july 2007 the risk premia spreads on bonds issued by eurozone sovereigns rose from historically low levels but they rose largely in tandem across the eurozone membership along with global banking stresses the rescue of the us investment bank bear stearns in march 2008 oddly enough marked the start of a distinctively european banking crisis accompanied by increased differentiation of countries within the eurozone with the greater expectation of public support for distressed banks the spreads that a sovereign paid tended to rise following evidence of stress in its domestic financial sector this was especially so in countries with lower growth prospects and higher debt burdens but there was as yet no feedback from banks to sovereigns finally as the limits of fiscal support for domestic banks became clearer and coinciding with the nationalization of anglo irish in january 2009 but gathering steam with evidence of the greek sovereign s distress in may 2010 sovereign weaknesses also came to be quickly transmitted to a more pessimistic assessment of the financial sector s prospects creating the potential of mutual destabilization ashoka mody and damiano sandri