oil price volatility and the asymmetric response of gasoline prices to oil price increases and decreases this paper analyzes the effect of volatility in oil prices on the degree of asymmetry in the response of gasoline prices to oil price increases and decreases several time series measures of the asymmetry between the responses of gasoline prices to oil price increases and decreases and several measures of the oil price volatility are constructed in all models the degree of asymmetry in gasoline prices declines with an increase in oil price volatility the results support the oligopolistic coordination theory as a likely explanation of the observed asymmetry and are not consistent with the standard search theory and the search theory with bayesian updating

stochastic modeling of financial electricity contracts abstract we discuss the modeling of electricity contracts traded in many deregulated power markets these forward futures type contracts deliver either physically or financially electricity over a specified time period and is frequently referred to as swaps since they in effect represent an exchange of fixed for floating electricity price we propose to use the heath jarrow morton approach to model swap prices since the notion of a spot price is not easily defined in these markets for general stochastic dynamical models we connect the spot price the instantaneous delivery forward price and the swap price and analyze two different ways to apply the heath jarrow morton approach to swap pricing either one specifies a dynamics for the non existing instantaneous delivery forwards and derives the implied swap dynamics or one models directly on the swaps the former is shown to lead to quite complicated stochastic models for the swap price even when the forward dynamics is simple the latter has some theoretical problems due to a no arbitrage condition that has to be satisfied for swaps with overlapping delivery periods to overcome this problem a practical modeling approach is analyzed the market is supposed only to consist of non overlapping swaps and these are modelled directly a thorough empirical study is performed using data collected from nord pool our investigations demonstrate that it is possible to state reasonable models for the swap price dynamics which is analytically tractable for risk management and option pricing purposes however this is an area of further research

is nonlinear drift implied by the short end of the term structure nonlinear drift models of the short rate are estimated using data on the short end of the term structure where the cross sectional relation is obtained by an analytical approximation the findings reveal that i nonlinear physical drift is not implied unless it is strongly affected by cross sectional dimensions of the data ii nonlinear risk neutral drift that allows for fast mean reversion for high rates is desirable to explain and predict observed patterns of yield spreads and iii for higher frequency data from which transitory shocks are removed ii still remains valid although the nonlinearity is somewhat reduced

nonlinear mean reversion in the short term interest rate using a new bayesian method for the analysis of diffusion processes this article finds that the nonlinear drift in interest rates found in a number of previous studies can be confirmed only under prior distributions that are best described as informative the assumption of stationarity which is common in the literature represents a nontrivial prior belief about the shape of the drift function this belief and the use of flat priors contribute strongly to the finding of nonlinear mean reversion implementation of an approximate jeffreys prior results in virtually no evidence for mean reversion in interest rates unless stationarity is assumed finally the article documents that nonlinear drift is primarily a feature of daily rather than monthly data and that these data contain a transitory element that is not reflected in the volatility of longermaturity yields the drift of the short term interest rate is an important determinant of a wide variety of asset prices both inside and outside the boundaries of what is often called fixed income while volatilities may be estimated relatively accurately using high frequency observations of the short rate the short rate s extreme persistence makes identifying the true shape of the drift function a particularly elusive goal if our goal is merely to fit prices then the difficulty in estimating a drift function can be avoided by backing out implied drifts using a no arbitrage approach such as hull and white 1990 or heath jarrow and morton 1992 these methods bypass the true distribution entirely focusing on solving for the risk neutral drift function that is consistent with the cross section of bond prices if our goal however is to learn from prices and to be able to assess theories such as the expectations hypothesis that link short and long rates then estimating the drift function under the true measure is unavoidable in several recent articles a variety of sophisticated econometric techniques have been brought to bear on the problem in particular

interest rate volatility and the term structure a two factor general equilibrium model we develop a two factor general equilibrium model of the term structure the factors are the short term interest rate and the volatility of the short term interest rate we derive closed form expressions for discount bonds and study the properties of the term structure implied by the model the dependence of yields on volatility allows the model to capture many observed properties of the term structure we also derive closed form expressions for discount bond options we use hansen s generalized method of moments framework to test the cross sectional restrictions imposed by the model the tests support the two factor model there are essentially two approaches to the modeling of the term structure of interest rates in continuous time the equilibrium approach pioneered by

a joint model for the term structure of interest rates and the macroeconomy we present and estimate a continuous time term structure model that incorporates observable macroeconomic variables and latent variables with a clear macroeconomic interpretation our model is able to accurately describe the joint dynamics for us macroeconomic variables and the yield curve however the observable variables do not explain the long end of the term structure central tendencies of these macroeconomic variables do a much better job in this respect these unobservable factors also play an important role in the description of the interest rate policy rule both observable and non observable factors determine the risk premia and hence bond excess holding returns copyright 2006 john wiley sons ltd

no arbitrage taylor rules with switching regimes we study the time varying nature of u s monetary policies summarized by the taylor rule based on a continuous time regime switching term structure model in this model the spot rate follows the taylor rule and government bonds at different maturities are priced by no arbitrage we allow the coefficients of the taylor rule and the dynamics of inflation and output gap to be regime dependent and estimate the model using government bond yields we find that the fed is proactive in controlling inflation in one regime and accommodative for growth in another moreover proactive monetary policies are associated with more stable inflation and output gap and therefore could have contributed to the great moderation our analysis also highlights the importance of switching regimes for term structure modeling without the regimes inflation and output can explain less than 50 of the variations of bond yields with the regimes the two variables can explain more than 80 of the variations of bond yields

an exploration of the forward premium puzzle in currency markets a standard empirical finding is that expected changes in exchange rates and interest rate differentials across countries are negatively related implying that uncovered interest rate parity is violated in the data this article provides new empirical evidence that suggests that violations of uncovered interest rate parity and its economic implications depend on the sign of the interest rate differentially a framework related to term structure models is developed to account for the puzzling relationship between expected changes in exchange rates and interest rate differentials estimation results suggest that a particular term structure model can account for the puzzling empirical evidence article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

term premiums in bond returns abstract this paper examines expected returns on u s treasury bills and on u s government bond portfolios expected bill returns are estimated from forward rates and from sample average returns both estimation methods indicate that expected returns on bills tend to peak at eight or nine months and never increase monotonically out to twelve months reliable inferences are limited to treasury bills and thus to maturities up to a year the variability of longer term bond returns preempts precise conclusions about their expected returns

coalitional bargaining with consistent counterfactuals abstract we propose a new solution concept for tu cooperative games in characteristic function form the scoop which builds on the symmetric nash bargaining solution nbs by adding a consistency requirement for negotiations inside every coalition the scoop specifies the probability of success and the payoffs to each coalition the players share the surplus of a coalition according to the nbs the disagreement payoffs are computed as the expectation of payoffs in other coalitions using a common probability distribution that is derived from the prior distribution the predicted outcome can be probabilistic or deterministic but only an efficient coalition can succeed with probability one we discuss the necessary and sufficient conditions for an efficient solution in either case the scoop always exists is generically unique for superadditive games and is easy to compute moreover in the spirit of the nash program we propose a non cooperative protocol whose stationary equilibrium identifies the scoop as the limit equilibrium outcome

take or pay contract robustness a three step story told by the brazil bolivia gas case abstract neo institutional economics nei has long shown that take or pay top long term contracts provide a robust framework for safeguarding the interests of both upstream and downstream parties in the gas industry the case of gas trade between brazil and bolivia presents an opportunity to re examine empirically and to review the robust nature of the top framework over time this case reveals that the positions of the contractors actually change giving rise to a veritable lifecycle of the contractual arrangement such a contract can be seen to span three successive phases the first phase of the contract cycle begins when it is signed allowing the investments to begin the second phase starts when investments have been completed and the actual trade in gas begins the third phase of the contract cycle comes when the increasing flow of gas comes close to saturating capacity and the volume levels for downstream market volume have been reached these three contract phases are thus distinguished by how robust the alignment of the parties interests is the added value of the paper is then both empirical and analytical the case study provides a brand new lifecycle analysis of the performance of top long term contracting into an nei framework

what can be learned from the free destination option in the lng imbroglio we examine the profitability of flexible routing by lng cargoes for a single supplier taking into account uncertainty in the medium term dynamics of gas markets first we model the trajectory of natural gas prices in asia northern america and europe using a threshold vector autoregression representation tvar in which the system s dynamics switches back and forth between high and low regimes of oil price volatility we then use the generalized impulse response functions girf obtained from the estimated threshold model to analyze the effects of volatility shocks on the regional gas markets dynamics lastly the valuation of destination flexibility in lng supplies is conducted using a real option approach we generate a sample of possible future regional price trajectories using monte carlo simulations of our empirical model and determine for each trajectory the optimal shipping decisions and their profitability our results portend a substantial source of profit for the industry and reveal future movements of vessels we discuss the conditional impact of destination flexibility on the globalization of natural gas markets

oil indexation market fundamentals and natural gas prices an investigation of the asian premium in natural gas trade abstract a heated debate has arisen over whether the asian premium i e higher prices in asia than elsewhere in natural gas trade is due to price discrimination or different market fundamentals determining the origin of this premium can help to guide the gas industries and policy makers in asia especially when the traditional oil indexed price mechanism fades away using a new systemic time series approach this paper explores the extent to which oil prices and market fundamentals contribute to variations in gas prices in japan the united states and germany we find clear cross country differences and time varying patterns gas prices are much less affected by supply and demand factors than oil prices in japan and germany whereas these factors are more important than oil prices in the us market which has a pricing hub through rolling windows and subsample analysis we discover that oil prices were important in japan and germany but the level of importance has declined significantly in recent years though the contribution of fundamentals does not change much the results show that asian gas prices are determined more by oil prices than by the market fundamentals thus the asian premium is more likely due to this oil indexed pricing mechanism rather than market fundamentals this suggests that developing asia s benchmark prices through trading hubs with a better reflection of regional specific fundamentals can lead to a more efficient allocation of gas resources

new keynesian macroeconomics and the term structure this article complements the structural new keynesian macro framework with a no arbitrage affine term structure model whereas our methodology is general we focus on an extended macro model with an unobservable time varying inflation target and the natural rate of output which are filtered from macro and term structure data we obtain large and significant estimates of the phillips curve and real interest rate response parameters our model also delivers strong contemporaneous responses of the entire term structure to various macroeconomic shocks the inflation target dominates the variation in the level factor whereas the monetary policy shocks dominate the variation in the slope and curvature factors

short term interest rates as subordinated diffusions in this article we cbaracterize and estimate the process for short term interest rates using federal funds interest rate data we presume that we are observing a discrete time sample of a stationary scalar diffusion we concentrate on a class of models in whicb the local volatility elasticity is constant and the drift has aflexible specufication to accommodate missing observations and to break the link between economic time and calendar time we model the sampling scheme as an increasing process that is not directly observed we propose and implement two new methods for estimation we find evidence for a volatility elasticity between one and onehalf and two when interest rates are high local mean reversion is smaul and the mechanism for inducing stationarity is the increased volatility of the diffusion process

information transmission and market interactions across the atlantic an empirical study on the natural gas market abstract this paper studies the international information transmission and market interactions in the u s and u k natural gas markets three well documented approaches are used to measure the relative importance on the process of price discovery under a quadvariate system after adjusting the effects of nonsynchronous trading prices robust results indicate our system that includes spot and futures prices within the two countries are driven by one common factor information disseminates efficiently among the four markets concerned the u s futures market dominates as the center for price discovery the u k futures market comes as the second the spot markets in the u s and u k are less efficient than their corresponding futures market where the u k spot market contributes the least and almost zero to the price discovery process asymmetric volatility spillovers are found in three of the four markets volatility in the u s futures market increases with positive returns which illustrates the inverse leverage effect in most of the commodity market volatilities in the spot markets are negatively related to returns which is analogous to the traditional leverage effect prevailing in most of the equity stock markets

continuous time methods in finance a review and an assessment i survey and assess the development of continuous time methods in finance during the last 30 years the subperiod 1969 to 1980 saw a dizzying pace of development with seminal ideas in derivatives securities pricing term structure theory asset pricing and optimal consumption and portfolio choices during the period 1981 to 1999 the theory has been extended and modified to better explain empirical regularities in various subfields of finance this latter subperiod has seen significant progress in econometric theory computational and estimation methods to test and implement continuous time models capital market frictions and bargaining issues are being increasingly incorporated in continuous time theory the roots of modern continuous time methods in finance can be traced back to the seminal contributions of merton 1969 1971 1973b in the late 1960s and early 1970s merton 1969 pioneered the use of continuous time modeling in financial economics by formulating the intertemporal consumption and portfolio choice problem of an investor in a stochastic dynamic programming setting merton 1973b also showed how such a framework can be used to develop equilibrium asset pricing implications thereby significantly extending the asset pricing theory to richer dynamic settings and expanding the scope of applications of continuous time methods to study problems in financial economics 1 within a span of about 30 years from the publication of merton s inf luential papers continuous time methods have become an integral part of financial economics indeed in certain core areas in finance such as e g asset pricing derivatives valuation term structure theory and portfolio selection continuoustime methods have proved to be the most attractive way to conduct research and gain economic intuition the continuous time approach in these areas has produced models with a rich variety of testable implications the econometric theory for testing continuous time models has made rapid strides in the last decade and has thus kept pace with the impressive progress on the theoretical front one hopes that the actual empirical investigations and estimation using the new procedures will follow suit soon

evaluating an alternative risk preference in affine term structure models dai and singleton 2002 and duffee 2002 show that there is a tension in affine term structure models between matching the mean and the volatility of interest rates this article examines whether this tension can be solved by an alternative parametrization of the price of risk the empirical evidence suggests that first the examined parametrization is not sufficient to solve the mean volatility tension second the usual result in the estimation of affine models indicating that some of the state variables are extremely persistent may have been caused by the lack of flexibility in the parametrization of the price of risk term structure models have several uses including pricing fixed income derivatives managing the risk of fixed income portfolios and detecting relationships between the term structure of interest rates and macrovariables such as inflation and consumption to perform well in these tasks term structure models must be numerically and econometrically tractable while matching the empirical properties of the term structure movements at least two empirical properties of the term structure of interest rates have been well established by financial economists over the years see dai and singleton 2003 for a survey first the term premium or the expected excess return of treasury bonds has a high time variability second the volatility of interest rates is time varying these two properties are so prominent in the data that they will be referred to as stylized facts while these two stylized facts are very well established in the empirical literature affine term structure models are thoroughly discussed in the theoretical literature affine models are those in which the yield of zero coupon bonds are affine functions of the model state variables classic

pricing mortgage backed securities in a multifactor interest rate environment a multivariate density estimation approach multivariate density estimation mde suggests that mortgage backed security mbs prices can be well described as a function of the level and slope of the term structure we analyze bow this function varies across mbss with different coupons an important finding is that the interest rate level proxies for the moneyness of the option the expected level of prepayments and the average life of the cash flows while the term structure slope controls for the average rate at which these cash flows should be discounted though the origination and prepayment behavior of mortgages differ substantially across coupons there remains an unexplained common factor in mbs prices this factor does not seem to be related to the usual suspects and therefore presents a puzzle to financial economists coauthors are robert f whitelaw matthew richardson and richard stanton article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

cooperation among liquefied natural gas suppliers is rationalization the sole objective this paper examines the development of cooperative strategies between countries exporting liquefied natural gas lng and members of the gas exporting countries forum gecf this economic study focuses specifically on an often raised scenario the emergence of a cooperative approach designed with the sole aim of logistic rationalization and which would not have any effect on lng prices we first assess the annual gains that may result from this market power free cooperative approach using a simple static transportation model the numerical results obtained suggest that in the absence of a gain redistribution policy this cooperative strategy will probably not be adopted because cooperation would not be a rational move for some exporters the problem of gain sharing is then formulated using cooperative game theory concepts several gain sharing methods have been studied including the shapley value and various nucleolus inspired concepts our results suggest that the choice of a redistribution policy appears relatively restricted out of the methods studied only one per capita nucleolus satisfies two key requirements core belonging and monotonicity in the aggregate lastly we look at how cooperation may give rise to a coordination cost and try to determine the maximum amount of this cost in view of the low level of this amount and the relative complexity of the sharing method implemented we consider that the credibility of a logistic cooperation scenario exempt from market power should be reappraised

the empirical implications of the cox ingersoll ross theory of the term structure of interest rates the one factor version of the cox ingersoll and ross model of the term structure is estimated using monthly quotes on u s treasury issues trading from 1952 through 1983 using data from a single yield curve it is possible to estimate implied short and long term zero coupon rates and the implied variance of changes in short rates analysis of residuals points to a probable neglected tax effect the term structure of interest rates is important to economists because the relationship among the yields on default free securities that differ in their term to maturity reflects the information available to the market about the future course of events the expectations hypothesis the liquidity preference hypothesis hicks 10 and the market segmentation hypothesis culbertson 6 are theories of the term structure that predict little more than that the implied forward rate is either equal to or not equal to the expectation of future spot rates cox ingersoll and ross 5 cir model the term structure of interest rates in a competitive equilibrium context their model has elements in common with the earlier hypotheses of the term structure however the cir model has a rich class of empirical implications not only for the pricing of default free securities but also for the pricing of bond options callable bonds and other types of financial claims this paper examines the extent to which the model in its simplest one factor form is descriptive of the prices of u s treasury bills bonds and notes traded from 1952 to 1983 section i describes the model and the parsimonious representation of bond prices which it implies section ii describes the data and section iii outlines the preliminary results obtained by fitting the model to observed data the final section outlines directions for future research

credit and economic activity credit regimes and nonlinear propagation of shocks in this paper we examine empirically whether credit plays a role as a nonlinear propagator of shocks this propagation takes the form of a threshold vector autoregression in which a regime change occurs if credit conditions cross a critical threshold using nonlinear impulseresponse functions we evaluate the dynamics implied by the threshold model these suggest that shocks have a larger effect on output in the tight credit regime than is normally the case and that contractionary monetary shocks typically have a larger effect than expansionary shocks finally using a nonlinear version of historical decompositions we attempt to determine the relative contribution to output growth of shocks and the nonlinear structure

the term structure of interest rates with housing abstract this paper develops a general equilibrium model to study the link between the amount of capital invested in housing assets and the term structure of interest rates in the model the production of housing assets is irreversible and housing assets can be used as collateral for borrowing funds agents decisions about consumption and investments in housing and non housing assets generate a time varying market price of risk that drives the dynamics of the term structure the calibration to u s data using the simulated method of moments technique captures the dynamics of consumption and the short and long term interest rates

interest rate volatility the yield curve and the macroeconomy abstract this paper provides theory and evidence that a low dimensional term structure model can simultaneously price bonds and related options it shows that a component of volatility risk largely unrelated to the shape of the yield curve is a determinant of expected excess returns for holding long maturity bonds it also finds evidence for this return relationship both in the model and directly in the data through regression analysis the paper also identifies a link between corporate earnings performance and interest rate volatility providing a channel driving interest rate volatility the structure of risk in the model that gives rise to these features of volatility is distinct from that inherent in recent models with unspanned stochastic volatility

the information content in bond model residuals an empirical study on the belgian bond market abstract we estimate daily vasicek cir and spline models on belgian data and compare the trading profits that can be made on the basis of their residuals abnormal returns measured using three different benchmarks are negatively related to once and twice lagged mispricing buying underpriced bonds and especially selling overpriced bonds yields significant abnormal returns even when the trade is delayed by up to five days after observing the mispricing the traditional spline model overfits the data and is least able to detect mispricing large model residuals are more likely to be the result of model misspecification or estimation than are small or medium sized residuals

throwing away a billion dollars the cost of suboptimal exercise strategies in the swaptions market abstract this paper studies the costs of applying single factor exercise strategies to american swap options when the term structure is actually driven by multiple factors using a multifactor string market model of the term structure we find that even when single factor models are recalibrated to match the market at every exercise date the exercise strategies they imply can be suboptimal based on estimates of notional amounts outstanding the total present value costs of following single factor strategies could be several billion dollars these results illustrate the importance of using well specified term structure models

can interest rate volatility be extracted from the cross section of bond yields most affine models of the term structure with stochastic volatility predict that the variance of the short rate should play a dual role in that it should also equal a linear combination of yields however we find that estimation of a standard affine three factor model results in a variance state variable that while instrumental in explaining the shape of the yield curve is essentially unrelated to garch estimates of the quadratic variation of the spot rate process or to implied variances from options we then investigate four factor affine models of the models tested only the model that exhibits unspanned stochastic volatility usv generates both realistic short rate volatility estimates and a good cross sectional fit our findings suggest that short rate volatility cannot be extracted from the cross section of bond prices in particular short rate volatility and convexity are only weakly correlated c 2009 elsevier b v all rights reserved

mitigating contractual hazards unilateral options and contract length in this article we consider the ways in which the desire for efficient low cost adaptation to change influences the tradeoff between the design and duration of long term contractual relationships we examine the distortions in contract terms occasioned by nonprice competition for natural gas in the presence of wellhead price regulation deviations from optimal contract incentives significantly raise the cost of being bound to long term agreements and shorten the duration of contracts the approach we adopt suggests a method for empirically assessing the efficiency of alternative contracting practices and legal standards

gaussian estimation of single factor continuous time models of the term structure of interest rates this article presents the first application in finance of recently developed methods for the gaussian estimation of continuous time dynamic models a range of one factor continuous time models of the short term interest rate are estimated using a discrete time model and compared to a recent discrete approximation used by chan karolyi longstaff and sanders 1992a hereafter ckls whereas the volatility of short term rates is highly sensitive to the level of rates in the united states it is not in the united kingdom the econometric estimation of continuous time models of the short term interest rate has been a relatively recent development in empirical finance see for example brown and dybvig 1986 melino and turnbull 1986 barone cuoco and zautzik 1991 babbs 1992 abken 1993 chen and scott 1993 das 1993 gibbons and ramaswamy 1993 pearson and sun 1994 lund 1994 pfann schotman and tschernig 1995 ait sahalia 1995 and broze scaillet and zakoian 1995 1 in an important study chan karolyi longstaff and sanders 1992a hereafter ckls develop a general framework to estimate and compare a range of different single factor term structure models for the short term interest rate their major conclusion is that term structure models with volatilities more highly sensitive to the level of interest rates than more generally used models have a closer empirical fit to the data in addition the functional form of the drift with or without mean reversion is of secondary importance to the correct specification of the conditional heteroskedasticity in ckls the continuous time models of the term structure are estimated using a discrete approximation we present in this article an alternative

have oil and gas prices got separated abstract this paper applies vector error correction models that show that oil and natural gas prices decoupled around 2009 before 2009 us and uk gas prices had a long term equilibrium with crude prices to which gas prices always reverted after exogenous shocks both us and uk gas prices adjusted to the crude oil price individually and departure from the equilibrium gas price on one continent resulted in a similar departure on the other after an exogenous shock the adjustment between us and uk gas prices took approximately 20 weeks on average and the convergence was mediated mainly by crude oil with a necessary condition that arbitrage across the atlantic was possible after 2009 however the uk gas price has remained integrated with oil price but the us gas price decoupled from crude oil price and the european gas price as the atlantic arbitrage has halted the oversupply from shale gas production has not been mitigated by north american export as there has been no liquefying and export capacity

non cooperative bargaining theory an introduction the paper provides an informal introduction to some of the main themes of the recent literature on non cooperative or sequential bargaining models it focuses in particular on the relationship between the new approach and the traditional axiomatic approach exemplified by nash bargaining theory it illustrates the new insights offered by the non cooperative approach by reference to a detailed analysis of the manner in which the presence of an outside option available to one of the parties will affect the negotiated outcome finally the difficulties which arise in extending this analysis to two person bargaining with incomplete information and to n person bargaining are discussed this is a revised version of the fourth review of economic studies lecture presented in april 1985 at the joint meeting of the association of university teachers of economics and the royal economic society held in oxford the choice of lecturer is made by a panel whose members are currently professors hahn mirrlees and nobay and the paper is refereed in the usual way this paper aims to provide an informal and elementary introduction to an approach to bargaining which has received a great deal of attention over the past few years the approach involves writing down some particular sequence of moves offers and replies to be made over time in the course of negotiations and then looking for a non cooperative equilibrium in the game thus specified in practice a perfect equilibrium or in games of incomplete information a sequential equilibrium while the approach appears at first sight to be very different in spirit from the traditional axiomatic approach in which a bargaining solution is specified by appealing to a number of general requirements which are deemed appropriate on the basis of some a priori considerations the two approaches are in fact complementary while the

the stochastic properties of term structure movements abstract the aim of this paper is to identify a stationary statistical model for treasury bill discount changes we find that the sample variance of discount changes are non stationary over short differencing intervals but stabilize as the intervals increase to quarterly or semi annual periods this result has important implications for pricing options and for analyzing the predictive properties of forward rates we show that the stochastic process structure leads to a downward revision in estimates of forward rate predictive power

macro factors and the term structure of interest rates this paper presents an essentially affine model of the term structure of interest rates making use of macroeconomic factors and their long run expectations the model extends the approach pioneered by kozicki and tinsley 2001 by modeling consistently long run inflation expectations simultaneously with the term structure application to the u s economy shows the importance of long run inflation expectations in the modeling of long term bond yields the paper also provides a macroeconomic interpretation for the latent factors found in standard finance models of the yield curve the level factor represents the long run inflation expectation of agents the slope factor captures business cycle conditions and the curvature factor expresses a clear independent monetary policy factor

nonparametric modeling of u s interest rate term structure dynamics and implications on the prices of derivative securities this paper develops a nonparametric model of interest rate term structure dynamics based on a spot rate process that permits only positive interest rates and a market price of interest rate risk that precludes arbitrage opportunities both the spot rate process and the mar ket price of interest rate risk are nonparametrically specified so that the model allows for maximal flexibility in fitting into the data marginal density of interest rates and historical term structure data are exploited to provide robust estimation of the nonparametric term structure model the model is implemented using u s data and the estimation results are compared to those in the available literature empirical results not only provide strong evidence that most traditional spot rate models and market prices of interest rate risk are misspecified but also confirm that the nonparametric model generates significantly differ ent term structures and prices of common derivatives

multilateral bargaining problems abstract in many situations in economics and political science there are gains from forming coalitions but conflict over which coalition to form and how to distribute the gains this paper presents an approach to such multilateral bargaining problems a solution to a multilateral bargaining problem specifies an agreement for each coalition that is consistent with the bargaining process in every coalition we establish the existence of such solutions show that they are determined by reservation prices and characterize these reservation prices as the payoffs of subgame perfect equilibrium outcomes of a non cooperative bargaining model journal of economic literature classification numbers c71 c72 c78

lng is linking regional natural gas markets evidence from the gravity model abstract evidence exists that global natural gas markets have become more integrated over time one possible explanation for this increased level of integration is that increased liquefied natural gas trade has increased the opportunity for price arbitrage by decreasing transport costs if this explanation is true then the natural gas market should become relatively more integrated because countries separated by large distances would be more willing to trade with each other we employ a gravity model to test whether trade in liquefied natural gas has helped to de regionalize the total natural gas market using trade in the compressed natural gas market as a comparison benchmark the results indicate that liquefied natural gas is indeed a global commodity whereas the compressed natural gas markets are more regional importantly we find that trade in liquefied natural gas has de regionalized the total natural gas market

exploiting the conditional density in estimating the term structure an application to the cox ingersoll and ross model we propose an empirical method that utilizes the conditional density of the state variables to estimate and test a term structure model with known price formulae using data on both discount and coupon bonds the method is applied to an extension of a two factor model due to cox ingersoll and ross 1985 cir our results show that estimates based on only bills imply unreasonably large price errors for longer maturities we reject the original cir model using a likelihood ratio test and conclude that the extended cir model also fails to provide a good description of the treasury market

a test of the cox ingersoll and ross model of the term structure we test the theory of the term structure of indexed bond prices due to cox ingersoll and ross cir the econometric method uses hansen s generalized method of moments and exploits the probability distribution of the single state variable in cir s model thus avoiding the use of aggregate consumption data it enables us to estimate a continuous time model based on discretely sampled data the tests indicate that cir s model for index bonds performs reasonably well when confronted with short term treasury bill returns the estimates indicate that term premiums are positive and that yield curves can take several shapes however the fitted model does poorly in explaining the serial correlation in real treasury bill returns article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

real option valuation of free destination in long term liquefied natural gas supplies this paper presents a real option model for the valuation of destination flexibility in long term lng supplies stochastic price dynamics in the different markets is modelled through geometric brownian motion processes mean reversion is considered as well as correlation between markets but instead of the usual correlation in return shocks a price convergence term is introduced representing the arbitrage streams between markets model parameters are estimated from market data on lng prices by maximum log likelihood the goodness of the fit for the proposed model is tested as well as for two alternative models confidence intervals for the parameters are given results for the model are calculated by monte carlo simulation frequency distributions for the main results are plotted the effect of the main parameters of the model is studied i e price volatilities price convergence initial prices in the markets mean reversion extra transportation costs number of alternative markets the value of destination flexibility is found to be an important share of the value of lng

short rate nonlinearities and regime switches abstract using non parametric estimation methods various authors have shown distinct non linearities in the drift and volatility function of the us short rate which are inconsistent with standard affine term structure models we document how a regime switching model with state dependent transition probabilities between regimes can replicate the patterns found by the non parametric studies to do so we use data from the uk and germany in addition to us data and include term spreads in some of our models we also examine the drift and volatility function of the term spread

reverse globalization does high oil price volatility discourage international trade this paper examines whether higher oil price volatility causes a reversal in globalization using a large annual panel data set covering 84 countries all over the world from 1984 to 2008 we investigate the impacts of oil price fluctuations on international trade namely exports and imports we present strong and robust evidence that international trade flows will be lower when oil prices fluctuate significantly we therefore conclude that oil price volatility hurts globalization

an empirical comparison of forward rate and spot rate models for valuing interest rate options our main goal is to investigate the question of which interest rate options valuation models are better suited to support the management of interest rate risk we use the german market to test seven spot and forward rate models with one and two factors for interest rate warrants for the period from 1990 to 1993 we identify a one factor forward rate model and two spot rate models with two factors that are not significantly outperformed by any of the other four models further rankings are possible if additional criteria are applied

likelihood based specification analysis of continuous time models of the short term interest rate an extensive collection of continuous time models of the short term interest rate is evaluated over data sets that have appeared previously in the literature the analysis which uses the simulated maximum likelihood procedure proposed by durham and gallant 2002 provides new insights regarding several previously unresolved questions for single factor models i find that the volatility not the drift is the critical component in model specification allowing for additional flexibility beyond a constant term in the drift provides negligible benefit while constant drift would appear to imply that the short rate is nonstationary in fact stationarity is volatility induced the simple constant elasticity of volatility model fits weekly observations of the three month treasury bill rate remarkably well but is easily rejected when compared with more flexible volatility specifications over daily data the methodology of durham and gallant can also be used to estimate stochastic volatility models while adding the latent volatility component provides a large improvement in the likelihood for the physical process it does little to improve bond pricing performance

regime shifts in a dynamic term structure model of u s treasury bond yields this article develops and empirically implements an arbitrage free dynamic term structure model with priced factor and regime shift risks the risk factors are assumed to follow a discrete time gaussian process and regime shifts are governed by a discrete time markov process with state dependent transition probabilities this model gives closed form solutions for zero coupon bond prices an analytic representation of the likelihood function for bond yields and a natural decomposition of expected excess returns to components corresponding to regime shift and factor risks using monthly data on u s treasury zero coupon bond yields we show a critical role of priced state dependent regime shift risks in capturing the time variations in expected excess returns and document notable differences in the behaviors of the factor risk component of the expected returns across high and low volatility regimes additionally the state dependence of the regime switching probabilities is shown to capture an interesting asymmetry in the cyclical behavior of interest rates the shapes of the term structure of volatility of bond yield changes are also very different across regimes with the well known hump being largely a low volatility regime phenomenon jel g12 this article develops and empirically implements an arbitrage free dynamic term structure model dtsm with priced factor and regimeshift risks the risk factors are assumed to follow a discrete time gaussian process and regime shifts are governed by a discrete time markov process with state dependent transition probabilities agents are assumed to know both the current state of the economy and the regime they are currently in this leads to regime dependent risk neutral pricing and an equilibrium term structure that reflects the risks of both changes in the state and shifts in regimes

international market integration for natural gas a cointegration analysis of prices in europe north america and japan this paper investigates the degree of integration of natural gas markets in europe north america and japan in the time period between the early 1990s and 2004 the relationship between international gas market prices and their relation to the oil price are explored through principal components analysis and johansen likelihood based cointegration procedure both of them show a high level of natural gas market integration within europe between the european and japanese markets as well as within the north american market at the same time the obtained results suggest that the european respectively japanese and the north american markets were not integrated

dynamic models of the term structure in the past 25 years tremendous progress has been made in modeling the dynamics of the term structure of interest rates which play an instrumental role in determining prices and hedging portfolios of fixed income derivative securities this article reviews the theoretical development of the dynamic models of the default free term structure and their applications in pricing interest rate options classic models sometimes termed equilibrium models and their multifactor extensions are outlined these models provide clear economic intuitions connecting the term structure with economic fundamentals they also lay a foundation for the framework of the arbitrage models that price interest rate derivatives on the basis of the market prices of bonds this framework has been expanded and enriched by recent advances in directly modeling observable market rates through the market models and in incorporating an internally consistent correlation structure through the infinite dimensional models

a comparison of inflation forecasts interest rate models provide slightly better monthly forecasts and substantially better eight and fourteen month forecasts of inflation than a univariate time series model the livingston surveys underestimate eight and fourteen month inflation rates especially during the high inflation period of 1978 81 in contrast eight and fourteen month inflation forecasts extrapolated from one month interest rates show little bias and track ex post eight and fourteen month inflation rates better than the survey forecasts

consistent bargaining conjectures in marriage and matching abstract in this model of bargaining in marriage markets we assume that each couple bargains in a systematic way over the distribution of the utility of their marriage and that each market participant has accurate conjectures about the utility he or she could obtain through a similar bargaining process with every other potential partner this paper formulates the bargaining model characterizes consistent conjectures and characterizes the matchings which are stable with respect to these conjectures

maximum likelihood estimation of latent affine processes this article develops a direct filtration based maximum likelihood methodology for estimating the parameters and realizations of latent affine processes filtration is conducted in the transform space of characteristic functions with a version of bayes rule used for recursively updating the joint characteristic function of latent variables and the data conditional upon past data an application to daily stock returns over 1953 96 reveals substantial divergences from emm based estimates in particular more substantial and time varying jump risk the implications for stock index options prices are discussed

a noncooperative theory of coalitional bargaining the authors explore a sequential offers model of n person coalitional bargaining with transferable utility and with time discounting their focus is on the efficiency properties of stationary equilibria of strictly superadditive games when the discount factor delta is sufficiently large it is shown that delay and the formation of inefficient subcoalitions can occur in equilibrium the latter for some or all orders of proposer however efficient stationary equilibrium payoffs converge to a point in the core as delta approaches one strict convexity is a sufficient condition for there to exist an efficient stationary equilibrium payoff vector for sufficiently high delta

monotonic solutions to general cooperative games etude de jeux cooperatifs qui sont des jeux a plusieurs joueurs mis sous la forme de coalition dans lesquels l utilite n est pas supposee etre transferable

groups collective decisions and markets abstract we consider a general equilibrium model where multi member households make efficient collective consumption decisions and operate in a competitive market environment individuals have the option to leave the household and make it on their own or join another household we study the effect of these outside options on household formation household stability and equilibrium existence

regulation and long term contracting in us natural gas markets this paper addresses the recent experience of the us natural gas industry with contracting and regulation the so called contracts problem between producers and pipelines we develop a simple model of contracting between a single buyer and seller emphasizing the determination of price and minimum purchase take or pay provisions we find that take or pay provisions are likely to emerge in regulated and unregulated markets characterized by uncertainty but that phased deregulation may well exacerbate the problem of contract adjustment our model is supported by empirical evidence drawn from recent samples of contracts between wellhead producers and pipelines

the relation between forward prices and futures prices abstract this paper consolidates the results of some recent work on the relation between forward prices and futures prices it develops a number of propositions characterizing the two prices these propositions contain several testable implications about the difference between forward and futures prices many of the propositions show that equilibrium forward and futures prices are equal to the values of particular assets even though they are not in themselves asset prices the paper then illustrates these results in the context of two valuation models and discusses the effects of taxes and other institutional factors

the message in north american energy prices how similar is the price behavior of north american natural gas fuel oil and power prices using current state of the art econometric methodology we explore the degree of shared trends across north american energy markets across these markets there appear to be effective arbitraging mechanisms for the price of natural gas and fuel oil but not for the price of electricity

gas and lng trading hubs hub indexation and destination flexibility in east asia abstract in the east asian gas markets issues like gas trading hubs hub indexed pricing and destination flexibility are being debated this paper examines the impact of a change in east asia s pricing benchmark and contract flexibility on the regional and global gas markets the paper uses the nexant world gas model a linear program with global cost minimization as the objective to our knowledge this study on hub competition price benchmark change and contract flexibility improvement in east asia will be the first in the literature and have real policy relevance the results show that both price benchmark change and contract flexibility improvements will create an overall benefit for the world and east asia importers but the impacts are different among exporters and importers however there is no evidence of competition among different benchmark hubs and no evidence that destination restrictions cause the asia premium it implies that removal of destination clauses has higher priority than the change to hub indexation for japan korea and chinese taipei but both should be treated equally in china the study also suggests that east asian importers should cooperate among themselves and with exporters to facilitate the hub creation and contract changes in east asia

liquidity backstops and dynamic debt runs liquidity backstops can mitigate runs in this paper we develop a dynamic model of debt runs based on he and xiong 2012 to identify both conceptually and quantitatively the value of a liquidity backstop for its run mitigating role for the purpose of identification we focus on the municipal bond markets for variable rate demand obligations and auction rate securities based on the run episodes in these markets during the financial crisis of 2007 09 and the calibrated model we find that the value of a liquidity backstop is about 14 5 basis points per annum our findings have important policy implications regarding the effectiveness of liquidity backstops in ameliorating problems of financial instability

term structure views of monetary policy under alternative models of agent expectations abstract term structure models and many descriptions of the transmission of monetary policy rest on the empirical relevance of the expectations hypothesis small differences in the perceived policy reaction function in var models of agent expectations strongly influence the relevance in the transmission mechanism of the expected short rate component of bond yields mean reverting or difference stationary characterizations of interest rates require large and volatile term premiums to match the observable term structure however short rate descriptions that capture shifting perceptions of long horizon inflation evident in survey data support a more substantial term structure role for short rate expectations

real and nominal interest rates a discrete time model and its continuous time limit i provide a general equilibrium theory of the term structure of real interest rates in a discrete time economy i derive the prices for one period and two period real bonds and a simple recursive formula for general k period bonds and prove that the price formula with appropriately specified parameters converges to that of the cox ingersoll and ross model 1985 in addition i consider the behavior of nominal bond prices in a partial equilibrium setting in which an exogenous price level process is correlated with the real economy finally i provide an illustrative empirical investigation of the model the results indicate a significant correlation between the price level and the growth rate of consumption which does not support the money nuetrality assumption underlying cox ingersoll and ross s nominal bond prices and related empirical studies such as gibbons and ramaswamyu 1992 heston 1991 and pearson and sun 1991 article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies