50th anniversary article option pricing valuation models and applications this paper surveys the literature on option pricing from its origins to the present an extensive review of valuation methods for european and american style claims is provided applications to complex securities and numerical methods are surveyed emphasis is placed on recent trends and developments in methodology and modeling

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

ironing out the kinks in executive compensation linking incentive pay to average stock prices abstract traditional stock option grant is the most common form of incentive pay in executive compensation applying a principal agent analysis we find this common practice suboptimal and firms are better off linking incentive pay to average stock prices among other benefits averaging reduces volatility by about 42 making the incentive pay more attractive to risk averse executives holding the cost of the option grant to the firm constant asian stock options are more cost effective than traditional stock options and provide stronger incentives to increase stock price more importantly the improvement is achieved with little impact on the option grant s risk incentives after adjusting for option cost finally averaging also improves the value and incentive effects of indexed stock options

estimation and simulation of risk premia in equity and foreign exchange markets abstract there is substantial evidence to reject constant risk premia financial models while time varying risk premia are often mentioned as an alternative the literature has yet to produce an example that accounts for the important time series properties of asset returns we inquire whether mean variance optimization models can do so we model asset risk with an absolute error version of the arch in mean hypothesis and model hedging motives that derive from variation in future real income and inflation to account for agent heterogeneity we consider a three country and two asset world our model predicts values for five excess returns relative to the us bill rate we use a systems approach to estimate the model parameters and then simulate the estimated model to determine if it can account for the important time series properties of risk premia

tests of conditional asset pricing with time varying moments and risk prices this paper tests conditional capital asset pricing models in a multivariate garch framework employing both constant and time varying prices of market and bond risk depending on the interpretation of the market portfolio the icapm with one hedge portfolio or the two factor myopic capm are supported using weekly data from july 1983 to december 1989 in contrast we reject the myopic single factor capm under a constant price of market risk we find that interest rate risk is highly significant which suggests that previous rejections of the conditional capm using only stock market data may be due to omitted hedge terms or an incomplete market factor

international asset pricing and portfolio diversification with time varying risk we test the conditional capital asset pricing model capm for the world s eight largest equity markets using a parsimonious generalized autoregressive conditional heteroskedasticity garch parameterization our methodology can be applied simultaneously to many assets and at the same time accommodate general dynamics of the conditional moments the evidence supports most of the pricing restrictions of the model but some of the variation in risk adjusted excess returns remains predictable during periods of high interest rates our estimates indicate that although severe market declines are contagious the expected gains from international diversification for a u s investor average 2 11 percent per year and have not significantly declined over the last two decades

implicit delivery options and optimal delivery strategies for financial futures contracts abstract futures contract specification usually allow the short position some variation as to when where how much and what is to be delivered in this paper we derive the optimal delivery policy for the treasury bond futures contracts and find that our policy produces profits that are positive and statistically significant this indicates that future prices are too high in that the short position can earn profits by skillfully exercising his delivery options we find the actual delivery policies of market participants depart substantially from the optimal strategy the implications of these findings for futures traders and bond dealers are discussed

nonparametric conditional pricing of higher order multivariate contingent claims abstract this paper describes and applies a nonparametric model for pricing multivariate contingent claims multivariate contingent claims are contracts whose payoffs depend on the future prices of more than one underlying variable the pricing however of these kinds of contracts represents a challenge all known models are adaptations of earlier ones that have been introduced to price plain vanilla calls and puts they are imposing strong assumptions on the distributional properties of the underlying variables in contrast this study adopts a methodology that relaxes such restrictions following barone adesi g bourgoin f giannopoulos k 1998 don t look back risk 11 august 100 104 barone adesi g engle r mancini l 2004 garch options in incomplete markets mimeo university of applied sciences of southern switzerland long x 2004 semiparametric multivariate garch model mimeo university of california riverside multivariate pathways for a set of underlying variables are constructed before the option payoffs are computed this enables the covariances in addition to the means and variances to be modelled in a dynamic and nonparametric manner the model is particular suitable for options whose payoffs depend on variables that are characterised by high nonlinearities and extremes and on higher order multivariate options whose underlying variables are more unlikely to conform to a common theoretical distribution

flexible and risk sharing supply contracts under price uncertainty we study supply contracts for deterministic demand but in an environment of uncertain prices we develop valuation methodologies for different types of supply contracts a time inflexible contract requires the firm to specify not only how many units it will purchase but also the timing of the purchase a time flexible contract allows the firm to specify the purchase amount over a given period of time without specifying the exact time of purchase other than time flexibility the suppliers may offer quantity flexibility to the firm as well i e purchase quantities could be within a prespecified quantity window finally risk sharing features can be incorporated in the contract in terms of the purchase price that the firm eventually pays to a supplier within a prespecified price window the firm pays the realized price but outside of it the firm shares in an agreed way added costs or benefits given the structure of a supply contract we study the firm s decision when to purchase and how many units in each purchase such that the expected net present value of the purchase cost plus inventory holding cost is minimized we discuss optimal purchasing strategies for both time flexible and time inflexible contracts with risk sharing features other interesting results include the analysis of two supplier sourcing environments and the exploitation of quantity flexibility in such contracts our discussion illustrates how time flexibility quantity flexibility supplier selection and risk sharing when carefully exercised can effectively reduce the sourcing cost in environments of price uncertainty

pricing options under generalized garch and stochastic volatility processes in this paper we develop an efficient lattice algorithm to price european and american options under discrete time garch processes we show that this algorithm is easily extended to price options under generalized garch processes with many of the existing stochastic volatility bivariate diffusion models appearing as limiting cases we establish one unifying algorithm that can price options under almost all existing garch specifications as well as under a large family of bivariate diffusions in which volatility follows its own perhaps correlated process through an equilibrium argument duan 1995 shows that options can be priced when the dynamics for the price of the underlying instrument follows a general autoregressive conditionally heteroskedastic garch process the theory of pricing under such processes is now well understood however the design of efficient numerical procedures for pricing them is lacking most applications resort to large sample simulation methods with a variety of variance reduction techniques the complexity of pricing arises from the massive path dependence inherent in garch models this path dependence causes typical lattice based procedures to grow exponentially in the number of time increments the lack of efficient numerical schemes hinders empirical tests among the wide array of competing garch models most tests of garch models limit themselves to the use of high frequency data on spot assets with little attention placed on the information content of options 1

valuing modularity as a real option we provide a general valuation approach for capital budgeting decisions involving the modularization in the design of a system within the framework developed by baldwin and clark baldwin c y k b clark 2000 design rules the power of modularity mit press cambridge ma we implement a valuation approach using a numerical procedure based on the least squares monte carlo method proposed by longstaff and schwartz longstaff f a e s schwartz 2001 valuing american options by simulation a simple least squares approach rev financial stud 14 1 113 147 the approach is accurate general and flexible

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

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

an economic model for evaluating mining and manufacturing ventures with output yield uncertainty this paper develops an operational risk management model for evaluating production efforts in manufacturing and mining industries where the resource to be exploited is nonhomogenous using acontingent claims methodology now commonly encountered in financial applications we formulate a production control model in an environment characterized bymarket andprocess uncertainty in our analysis market risk is depicted by the output price while process uncertainty is captured by the random variability inherent in the output s yield in this light adjustments to the rate of production are viewed as a sequence of nested real options affording operating flexibility we account for an optimal sequence of production adjustments over a preestablished production horizon by taking the production rate as an adapted positive real valued process accordingly techniques of stochastic control theory and contingent claims analysis cca are employed to ensure value maximizing production policies are rendered in a manner consistent with an equilibrium price structure

a dynamic globally diversified index neutral synthetic asset allocation strategy an investor with the ability to assess the prospective return and risk structure of the global capital markets can construct portfolios that over time will not only outperform actively or passively managed domestic asset portfolios but will also outperform passively managed global portfolios a bayesian approach to dynamic seemingly unrelated regression dsur is a robust and effective means to forecast the one step ahead conditional distribution of asset returns this approach recognizes the time varying nature of the global capital markets the predictive moments are used to derive a single factor return model once an index portfolio is specified the index portfolio represents an investor s underlying portfolio given the factor model that assesses the relative attractiveness and risk of the assets in relation to the index an index neutral portfolio is constructed as an overlay to enhance the returns of the index portfolio this portfolio is mean variance optimal is notional neutral i e the sum of the asset exposures is zero and has returns that are designed to be uncorrelated with the returns of the index portfolio the implementation of such an index neutral portfolio using derivative securities is simulated over the period january 1988 to december 1993

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

jump diffusion option valuation in discrete time we develop a simple discrete time model to value options when the underlying process follows a jump diffusion process multivariate jumps are superimposed on the binomial model of cox ross and rubinstein 1979 to obtain a model with a limiting jump diffusion process this model incorporates the early exercise feature of american options as well as arbitrary jump distributions it yields an efficient computational procedure that can be implemented in practice as an application of the model we illustrate some characteristics of the early exercise boundary of american options with certain types of jump distributions jump diffusion processes are popular in option valuation models these processes were incorporated by merton 1976 into the theory of option valuation and constitute an important alternative to the lognormal diffusion process assumed in the black and scholes 1973 model in this paper we develop a tractable discrete time model for valuing options with these processes many authors have suggested that incorporating jumps in option valuation models may explain some of the large empirical biases exhibited by the black scholes model 1 however in many cases closed form solutions for valuing options are not available for example this is true when there is a positive probability of early exercise when the jump distribution is neither lognormal nor discrete or when the option is based on the term structure of interest rates see ahn and thompson 1988 and jarrow and madan 1991 in these important cases the model developed in this paper can be used to value options another aim of this paper is to provide a model which relies on only simple mathematics to price options with jump diffusion processes it is hoped that the key economic relationships underlying jump diffusion models are transparent in this model we provide enough details to make the procedure readily accessible

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

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

can cross country portfolio rebalancing give rise to forward bias in fx markets abstract this paper develops a model of exchange rate dynamics that takes into account positions in foreign and domestic equities in addition to standard short term riskless securities the modeling of cross country stock holdings is motivated by evidence that a large and ever increasing proportion of currency flows has been directed toward national stock markets to the extent that there is not perfect risk sharing investors tend to hold currency risk and international equity risk as a bundle this paper examines the impact of such cross country covariance risk on the relationship between exchange rate returns and interest rate differentials in particular we show that the sign and magnitude of the coefficient on the lagged interest differential is governed by a type of time varying beta risk that reflects the conditional covariance between exchange rate returns and the return differential between foreign and domestic equities as this cross country beta is predominantly negative our results have direct implications on the empirical failure of the uncovered interest parity uip hypothesis suggesting that the traditional uip regression equation is confounded in a non standard nonlinear way by the presence of cross country equity flows simulation experiments show that accounting for such portfolio rebalancing activities may in part help to explain the anomalous slope coefficient associated with the forward premium

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

options on the minimum or the maximum of two risky assets analysis and applications this paper provides analytical formulas for european put and call options on the minimum or the maximum of two risky assets the properties of these formulas are discussed in detail options on the minimum or the maximum of two risky assets are useful to price a wide variety of contingent claims of interest to financial economists applications discussed in this paper include the valuation of foreign currency debt option bonds compensation plans risk sharing contracts secured debt and growth opportunities involving mutually exclusive investments

pricing american style securities using simulation abstract we develop a simulation algorithm for estimating the prices of american style securities i e securities with opportunities for early exercise our algorithm provides both point estimates and error bounds for the true security price it generates two estimates one biased high and one biased low both asymptotically unbiased and converging to the true price combining the two estimators yields a confidence interval for the true price the proposed algorithm is especially attractive compared with lattice and finite difference methods when there are multiple state variables and a small number of exercise opportunities preliminary computational evidence is given

pricing multivariate contingent claims using estimated risk neutral density functions abstract many asset price series exhibit time varying volatility jumps and other features inconsistent with assumptions about the underlying price process made by standard multivariate contingent claims mvcc pricing models this article develops an interpolative technique for pricing mvccs flexible nls pricing that involves the estimation of a flexible multivariate risk neutral density function implied by existing asset prices as an application the flexible nls pricing technique is used to value several bivariate contingent claims dependent on foreign exchange rates in 1993 and 1994 the bivariate flexible risk neutral density function more accurately prices existing options than the bivariate log normal density implied by a multivariate geometric brownian motion in addition the bivariate contingent claims analyzed have substantially different prices using the two density functions suggesting flexible nls pricing may improve accuracy over standard methods

price and volatility spillovers in scandinavian stock markets abstract new evidence is provided on price and volatility spillovers among the danish norwegian swedish and finnish stock markets the impact of good news market advances and bad news market retreats is described by a multivariate exponential generalized autoregressive conditionally heteroskedastic egarch model volatility transmission is asymmetric spillovers being more pronounced for bad than good news significant price and volatility spillovers exist but they are few in number

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

simple binomial processes as diffusion approximations in financial models a binomial approximation to a diffusion is defined as computationally simple if the number of nodes grows at most linearly in the number of time intervals it is shown how to construct computationally simple binomial processes that converge weakly to commonly employed diffusions in financial models the convergence of the sequence of bond and european option prices from these processes to the corresponding values in the diffusion limit is also demonstrated numerical examples from the constant elasticity of variance stock price and the cox ingersoll and ross 1985 discount bond price are provided article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

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

monte carlo valuation of american options through computation of the optimal exercise frontier this paper introduces a monte carlo simulation method for pricing multidimensional american options based on the computation of the optimal exercise frontier we consider bermudan options that can be exercised at a finite number of times and compute the optimal exercise frontier recursively we show that for every date of possible exercise any single point of the optimal exercise frontier is a fixed point of a simple algorithm once the frontier is computed we use plain vanilla monte carlo simulation to price the option and obtain a low biased estimator we illustrate the method with applications to several types of options

generalised soft binomial american real option pricing model fuzzy stochastic approach abstract the stochastic discrete binomial models and continuous models are usually applied in option valuation valuation of the real american options is solved usually by the numerical procedures therefore binomial model is suitable approach for appraising the options of american type however there is not in several situations especially in real option methodology application at to disposal input data of required quality two aspects of input data uncertainty should be distinguished risk stochastic and vagueness fuzzy traditionally input data are in a form of real crisp numbers or crisp stochastic distribution function therefore hybrid models combination of risk and vagueness could be useful approach in option valuation generalised hybrid fuzzy stochastic binomial american real option model under fuzzy numbers t numbers and decomposition principle is proposed and described input data up index down index growth rate initial underlying asset price exercise price and risk free rate are in a form of fuzzy numbers and result possibility expected option value is also determined vaguely as a fuzzy set illustrative example of equity valuation as an american real call option is presented

convergence from discrete to continuous time contingent claims prices this article generalizes the cox ross and rubinstein 1979 binomial option pricing model and establishes a convergence from discrete time multivariate multinomial models to continuous time multidimensional diffusion models for contigent claims prices the key to the approach is to approximate the n dimensional diffusion price process by a sequence of n variate n 1 nomial processes it is shown that contingent claims prices and dynamic replicating portfolio strategies derived from the discrete time models converge to their corresponding continuous time limits article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

misspecification of capital asset pricing this study documents empirical anomalies which suggest that either the simple one period capital asset pricing model capm is misspecified or that capital markets are inefficient in particular portfolios based on firm size or earnings price e p ratios experience average returns systematically different from those predicted by the capm furthermore the abnormal returns persist for at least two years this persistence reduces the likelihood that these results are being generated by a market inefficiency rather the evidence seems to indicate that the equilibrium pricing model is misspecified however the data also reveals that an e p effect does not emerge after returns are controlled for the firm size effect the firm size effect largely subsumes the e p effect thus while the e p anomaly and value anomaly exist when each variable is considered separately the two anomalies seem to be related to the same set of missing factors and these factors appear to be more closely associated with firm size than e p ratios

valuation of product mix flexibility using real options abstract flexibility in manufacturing operations is becoming increasingly more important to industrial firms due to e g increasing market demand volatility internationalisation of markets and competition and shorter product life cycles defining measuring and evaluating manufacturing flexibility have not been straightforward neither in theory nor in practice the use of real options has shown to be an accessible approach for the valuation of certain types of flexibility when using real options for capital budgeting purposes it is possible to take flexibility options into account in the valuation process in this paper we use real options to evaluate one specific type of manufacturing flexibility i e product mix flexibility we provide both theoretical and practical perspectives based on a real case the main interest of the company under study is to evaluate product mix flexibility with respect to capacity set ups level of automation and multi functionality of resources the case involves multiple products and demand uncertainty wherefore product demands are used as the underlying asset in the real options models thus the contribution of this paper concerns the combination of real case multiple products capacity constraints and set up costs the results of the analysis show that i the value of flexibility decreases when demand volatility increases ii flexible resources add substantial value as compared to dedicated resources and iii the flexibility value of marginal capacity decreases with increasing levels of capacity

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

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

a new approach to testing asset pricing models the bilinear paradigm we propose a new approach to estimating and testing asset pricing models in the context of a bilinear paradigm introduced by kruskal 18 this approach is both simple and at the same time quite general as an illustration we apply it to the special case of the arbitrage pricing model where the number of factors is pre specified the data appear to be generally in conflict with a five or seven factor representation of the model used by roll and ross 30 when we consider the number of replications of our test and the large number of observations on which it is performed the frequency with which we reject the three factor apm does not lead us to conclude that this model is unrepresentative of security returns further the rejection of the five and seven factor versions is to be expected if the three factor version is correct the paradigm gives insight into the appropriate specification of the model and suggests that there may be a small number of economy wide factors that affect security returns tests of asset pricing models on the basis of observed stock market data have represented a staple of the financial economics literature of the past twenty years the early work is reviewed in the famous paper by jensen 12 and papers by fama and macbeth 6 rosenberg and marathe 31 and roll and ross 30 there has been a great deal of confusion regarding what testable propositions are implied by these models see discussion in roll 29 in this paper we show that at a minimum all asset pricing models yet proposed imply a simple easily testable hypothesis which we refer to as the bilinear hypothesis while specific models may imply further testable propositions if the bilinear hypothesis is rejected the model is inconsistent with the data and should be rejected our test exploits the fact that the economic content of any equilibrium asset pricing model can be expressed in the form of a potentially refutable constraint on the set of parameters of the process generating security returns this constraint specifies that given a set of security specific characteristics there exists a linear relationship common across securities relating expected returns to these

the quality delivery option in treasury bond futures contracts this paper uses three methods to estimate quality option values for cbot treasury bond futures contracts it presents evidence regarding 1 payoffs from exercising this option at delivery 2 estimates from a t bond futures pricing model that incorporates this option and 3 estimates obtained from an exchange option pricing formula the results indicate that this option is worth considerably less than reported by kane and marcus 1986a for example payoffs obtained by switching from the bond cheapest to deliver three months prior to delivery to the one cheapest at time of delivery average less than 0 30 percentage points of par

regime switching analysis of adr home market pass through abstract we model and estimate adrs home market pass through and pricing to market using a regime switching approach which nests the two regimes in a conditional capital asset pricing model and treats any changes in these two regimes probabilistically our results from the 1998 to 2006 data show that the pricing to market regime dominates adrs from china and japan whereas the home market pass through regime dominates adrs from argentina and germany when their respective home markets are volatile

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

tests of asset pricing with time varying expected risk premiums and market betas tests of asset pricing models are developed that allow expected risk premiums and market betas to vary over time these tests exploit the relation between expected excess returns and current market values using weekly data for 1963 through 1982 on ten common stock portfolios formed according to equity capitalization a single risk premium model is not rejected if the expected premium is time varying and is not constrained to correspond to a market factor conditional mean variance efficiency of a value weighted stock index is rejected and the rejection is insensitive to how much variability of expected risk premiums is assumed financial economists have studied valuation models in which securities expected returns are related to the covariances of unanticipated returns with the return on the market portfolio or with other risk factors empirical tests of such models typically have employed unconditional sample moments of returns recent studies provide mounting evidence that expected returns change over time with information such evidence presents an opportunity to develop new approaches for evaluating and implementing asset pricing models that exploit this time variation this paper presents new tests of financial valuation models in which expected returns are allowed to vary over time time series of relative

option pricing in a multi asset complete market economy this paper extends the seminal cox ross rubinstein 1979 crr hereafter binomial model to multiple assets it differs from previous models in that it is derived under the complete market environment specified by duffie and huang 1985 and he 1990 the complete market assumption requires the number of states to grow linearly with the number of assets however the number of correlations grows at a faster rate causing the crr model to be indirectly extendable we solve such a problem by recognizing that the fast growing correlation number is matched by the number of the angles of the edges of a hypercube spanned by the risky assets as a result we derive a solution that allows the number of equations to equal the number of risky assets and the riskless bond the resulting tree structure hence provides the same intuition of pricing and hedging contingent claims as that provided by the crr model finally the proposed model is not only as easy to implement as the one dimensional crr model but also it is more memory efficient than the existing multi factor lattice models

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 note on the pricing of commodity linked bonds the owner of a commodity linked bond can exchange the bond s face value for the maturity value of a commodity in an interesting application of optionpricing theory schwartz 7 provides a general framework for valuing commodity linked bonds this very general valuation framework allows for commodity price risk default risk and interest rate risk along with interest payments and dividends a partial differential equation and its associated boundary condition are derived but not solved schwartz states that the solution to the general problem is difficult even by numerical methods in order to find closed form solutions schwartz considers commodity price risk in conjunction with default risk or interest rate risk but not both this note presents a closed form solution for the value of a commodity linked bond when all three types of risk are present

dynamic r d investment policies this paper examines dynamic r d investment policies and the valuation of r d programs in a contingent claims framework we incorporate the following characteristics of r d programs into our model learning by doing collateral learning between different projects in the program interaction between project cash flows periodic reevaluations of the program different intensities of investment capital rationing constraints and competition we show that a firm may invest in multiple projects even if only one can be implemented after development is complete furthermore the firm may significantly alter its funding policy over time for example it may simultaneously develop multiple projects for a period of time then focus on a lead project and potentially resume funding of a backup project if the lead project fails to deliver on its early promise we show how a firm can forecast expected r d spending through time for an optimally executed r d program while project volatility plays an important role in determining r d program value we find that for high volatility projects the optimal investment policy is not very sensitive to changes in or misestimation of volatility in considering whether to accelerate development of a project a firm should balance the adverse effects of increased costs and the loss of investment flexibility against the positive effects of rapid uncertainty resolution and accelerated cash flows in the presence of a budget constraint that prevents the firm from simultaneously accelerating projects and developing projects in parallel we find that if one project significantly dominates another early in the development stage the option to accelerate the lead project is likely to be more valuable than the option to exchange projects thus the backup project would be shelved in order to commit extra resources to development of the lead project finally competition from other firms leads to more parallel investment in the early development stages of projects less parallel investment in the latter stages of development and lower overall investment

primal dual simulation algorithm for pricing multidimensional american options this paper describes a practical algorithm based on monte carlo simulation for the pricing of multidimensional american i e continuously exercisable and bermudan i e discretely exercisable

numerical valuation of high dimensional multivariate european securities we consider the problem of pricing a contingent claim whose payoff depends on several sources of uncertainty using classical assumptions from the arbitrage pricing theory the theoretical price can be computed as the discounted expected value of future cash flows under the modified risk neutral information process although analytical solutions have been developed elsewhere for a few particular option pricing problems computing the arbitrage prices of securities under several sources of uncertainty is still an open problem in many instances in this paper we present efficient numerical techniques based upon monte carlo simulation for pricing european contingent claims depending on an arbitrary number of risk sources we introduce in particular the method of quadratic resampling qr a new powerful error reduction technique for monte carlo simulation quadratic resampling can be efficiently combined with classical variance reduction methods such as importance sampling our numerical experiments show th

the spark spread and clean spark spread option based valuation of a power plant with multiple turbines abstract this paper offers a novel study of two key factors that affect the valuation of a natural gas fired power plant having multiple turbines carbon allowance prices and the ability to switch among turbines amid stricter environmental rules on co2 emissions a power plant operator needs to be able to judge how the purchase of carbon allowances affects the plant s expected value and whether the plant s value rises from switching among turbines this paper presents a model analysis of a spark spread and clean spark spread option based valuation of a power plant with multiple gas turbines using a bivariate and a tri variate lattice respectively results demonstrate that the purchase of co2 allowances lowers the plant s expected value conversely when operations of turbines are switched in response to price movements the plant s value increases this outcome has implications for plant management decisions when to switch among turbines and how the purchase of co2 allowances affects the plant s value

a lattice approach for pricing of multivariate contingent claims abstract the lattice approach developed by boyle evnine and gibbs beg is hitherto one of the most appealing when it comes to pricing multivariate contingent claims the beg approach has however some problems two of the major ones being that the method can lead to negative jump probabilities and has a slow rate of convergence in this paper a lattice approach the nek approach is developed which avoids both of the aforementioned problems of the beg approach it is shown that the nek approach has a very fast rate of convergence the results are accurate enough for most needs with as few as ten time steps and the results are astonishingly accurate with twenty time steps moreover the nek approach is simple and easy to understand and also easy to implement the latter property follows from the fact that all jump probabilities are equal and that the formulas for the jump sizes are extremely simple

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

options on the maximum or the minimum of several assets using an intuitive approach that also provides new intuition concerning the black and scholes equation this paper extends the results of johnson and stulz to the pricing of options on the minimum or the maximum of several risky assets

numerical valuation of high dimensional multivariate american securities we consider the problem of pricing an american contingent claim whose payoff depends on several sources of uncertainty several efficient numerical lattice based techniques exist for pricing american securities depending on one or few up to three risk sources however these methods cannot be used for high dimensional problems since their memory requirement is exponential in the number of risk sources we present an efficient numerical technique that combines monte carlo simulation with a particular partitioning method of the underlying assets space which we call stratified state aggregation ssa using this technique we can compute accurate approximations of prices of american securities with an arbitrary number of underlying assets our numerical experiments show that the method is practical for pricing american claims depending on up to 400 risk sources

tests of the capm with time varying covariances a multivariate garch approach this paper examines an asset pricing model in which the sharpe lintner capm and the zero beta capm are special cases the model allows the ratio of expected market risk premium to market variance the conditional expected excess returns and the risks to change over time the results are found to be sensitive to the choice of the portfolio formation techniques significant time variability is shown in the conditional expected excess asset returns and risks and also in the reward to risk ratio

derivative pricing with wishart multivariate stochastic volatility this paper deals with the pricing of derivatives written on several underlying assets or factors satisfying a multivariate model with wishart stochastic volatility matrix this multivariate stochastic volatility model leads to a closed form solution for the conditional laplace transform and quasi explicit solutions for derivative prices written on more than one asset or underlying factor two examples are presented i a multiasset extension of the stochastic volatility model introduced by heston 1993 and ii a model for credit risk analysis that extends the model of merton 1974 to a framework with stochastic firm liability stochastic volatility and several firms a bivariate version of the stochastic volatility model is estimated using stock prices and moment conditions derived from the joint unconditional laplace transform of the stock returns

an algorithm for computing values of options on the maximum or minimum of several assets an approximate method is developed for computing the values of european options on the maximum or the minimum of several assets the method is very fast and is accurate for parameter ranges that are often of the most interest the approach casts the problem in terms of order statistics and can be used to handle situations where the initial asset prices the asset variances and the covariances are all unequal numerical values are given to illustrate the accuracy of the method

numerical evaluation of multivariate contingent claims we develop a numerical approximation method for valuing multivariate contingent claims the approach is based on an n dimensional extension of the lattice binomial method closed form solutions for the jump probabilities and the jump amplitudes are obtained the accuracy of the method is illustrated in the case of european options when there are three underlying assets article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

a lattice framework for option pricing with two state variables a procedure is developed for the valuation of options when there are two underlying state variables the approach involves an extension of the lattice binomial approach developed by cox ross and rubinstein to value options on a single asset details are given on how the jump probabilities and jump amplitudes may be obtained when there are two state variables this procedure can be used to price any contingent claim whose payoff is a piece wise linear function of two underlying state variables provided these two variables have a bivariate lognormal distribution the accuracy of the method is illustrated by valuing options on the maximum and minimum of two assets and comparing the results for cases in which an exact solution has been obtained for european options one advantage of the lattice approach is that it handles the early exercise feature of american options in addition it should be possible to use this approach to value a number of financial instruments that have been created in recent years

valuing operational flexibility under exchange rate risk in this paper we develop a stochastic dynamic programming formulation for the valuation of global manufacturing strategy options with switching costs overall we adopt a hierarchical approach first exchange rates are modeled as stochastic diffusion processes that exhibit intercountry correlation second the firm s global manufacturing strategy determines options for alternative product designs as well as supply chain network designs product options introduce international supply flexibility supply chain network options determine the firm s manufacturing flexibility through production capacity and supply chain network linkages third switching costs determine the cost of operational hedging i e the costs associated with reducing downside risks overall the firm maximizes its expected discounted global after tax value through the exercise of product and supply chain network options and or through exploitation of operational flexibility contingent on exchange rate realizations in this environment the firm must trade off fixed operating costs switching costs and the economic benefits derived from exploiting differentials in factor costs and corporate tax rates a multinomial approximation of correlated exchange rate processes is proposed that leads to a consistent and tractable lattice model for this compound option valuation problem we then demonstrate how the global manufacturing strategy planning model framework can be utilized to analyze financial and operational hedging strategies

discrete time valuation of american options with stochastic interest rates we develop an arbitrage free discrete time model to price american style claims for which domestic term structure risk foreign term structure risk and currency risk are important this model combines a discrete version of the heath jarrow and morton 1992 term structure model with the binomial model of cox ross and rubinstein 1979 it converges weakly to the continuous time models in amin and jarrow 1991 1992 the general model is path dependent and can be implemented with arbitrary volatility functions to value claims with maturity up to five years the model is illustrated with applications to long dated american currency warrants and a cross rate swap from the quanto class article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

implied volatility functions in arbitrage free term structure models abstract we test six term structure models in the heath jarrow and morton 1992 class using eurodollar futures and options data from 1987 1992 we study the time series of implied interest rate volatilities from these models using one day lagged implied volatilities our one and two parameter models simultaneously price an average of 18 5 options each day with an average absolute error of one and a half to two basis points although the models fit well we document systematic strike price and time to maturity biases for all models we also implement simple trading strategies to test whether the models identify genuine biases

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