the regulatory choice of noncompliance in emissions trading programs this paper addresses the following question to achieve a fixed aggregate emissions target cost effectively should emissions trading programs be designed and implemented to achieve full compliance or does allowing a certain amount of noncompliance reduce the costs of reaching the emissions target the total costs of achieving the target consist of aggregate abatement costs monitoring costs and the expected costs of collecting penalties from noncompliant firms under common assumptions i show that allowing noncompliance is cost effective only if violations are enforced with an increasing marginal penalty however one can design a policy that induces full compliance with a constant marginal penalty that meets the aggregate emissions target with lower expected costs this last result does not depend on setting an arbitrarily high constant marginal penalty in fact the marginal penalty need not be higher than the equilibrium marginal penalty under the policy with the increasing marginal penalty and can actually be lower finally tying the marginal penalty directly to the permit price allows the policy objective to be achieved without any knowledge of firms abatement costs

the term structure of implied forward volatility recovery and informational content in the corn options market using a flexible method we develop the term structure of volatility implied by corn futures options with differing maturities and evaluate its ability to predict subsequent realized price volatility the implied forward volatilities anticipate realized volatility well for the nearby interval the implied forward volatilities provide unbiased forecasts and are superior to forecasts based on historical volatilities for more distant intervals early year options predict the direction and magnitude of future volatility changes about as well as a three year moving average and better than a naive forecast however later year options display less forecast power in part due to reduced trading activity

a lagrange multiplier test for causality in variance we adapt the lagrange multiplier lm principle to test for noncausality in variance of financial returns the new test is compared with a portmanteau statistic cheung y w ng l k 1996 a causality in variance test and its application to financial market prices journal of econometrics 72 33 48 a monte carlo study reveals superior power of the lm test

fractional integration in agricultural futures price volatilities this article tests whether the volatility of agricultural futures prices exhibits fractional integration volatility series were constructed for fourteen agricultural futures price series with over 5 300 observations per series the volatility series exhibit strong long term dependence which is an indicator of fractional integration a fractional integration model figarch 1 d 1 performs significantly better than a traditional volatility model garch 1 1 in modeling agricultural futures price volatility

modelling volatility spillovers for bio ethanol sugarcane and corn spot and futures prices the recent and rapidly growing interest in biofuel as a green energy source has raised concerns about its impact on the prices returns and volatility of related agricultural commodities analyzing the spillover effects on agricultural commodities and biofuel helps commodity suppliers hedge their portfolios and manage the risk and co risk of their biofuel and agricultural commodities there have been many papers concerned with analyzing crude oil and agricultural commodities separately the purpose of this paper is to examine the volatility spillovers for spot and futures returns on bio ethanol and related agricultural commodities specifically corn and sugarcane the diagonal bekk model is used as it is the only multivariate conditional volatility model with well established regularity conditions and known asymptotic properties the daily data used are from 31 october 2005 to 14 january 2015 the empirical results show that in 2 of 6 cases for the spot market there were significant negative co volatility spillover effects specifically corn on subsequent sugarcane co volatility with corn and sugarcane on subsequent corn co volatility with sugarcane in the other 4 cases there are no significant co volatility spillover effects there are significant positive co volatility spillover effects in all 6 cases namely between corn and sugarcane corn and ethanol and sugarcane and ethanol and vice versa for each of the three pairs of commodities it is clear that the futures prices of bio ethanol and the two agricultural commodities corn and sugarcane have stronger co volatility spillovers than their spot price counterparts these empirical results suggest that the bio ethanol and agricultural commodities should be considered as viable futures products in financial portfolios for risk management

asymmetric adjustments in the ethanol and grains markets this paper examines the long and short run asymmetric adjustments and pairs trades for nine pairs of spot and futures prices itemized as three own pairs for three different bio fuel ethanol types three own pairs for three related agricultural products namely corn soybeans and sugar and three cross pairs that included hybrids of the spot price of each of the agricultural products and an ethanol futures price most of the spreads asymmetric adjustments generally occur during narrowing the three ethanol pairs that contain the ecbot futures with each of chicago spot new york harbor spot and western european rotterdam spot show different long run adjustments arbitrage profitable opportunities and price risk hedging capabilities the asymmetric spread adjustments for the three grains are also different with corn spread showing the strongest long run widening adjustment and sugar showing the weakest narrowing adjustment among others the empirical analysis indicates the importance of potentially hedging the spot prices of agricultural commodities with ethanol futures contracts which sends an important message that the ethanol futures market is capable of hedging price risk in agricultural commodity markets the short run asymmetric adjustments for individual prices in the nine pairs with the exception of the corn own pair underscore the importance of futures prices in the price discovery and hedging potential particularly for ethanol futures

volatility spillovers between food and energy markets a semiparametric approach previous literature on volatility links between food and energy prices is scarce and mainly based on parametric approaches this article examines these links by using a semiparametric garch model recently proposed by long et al 2011 which is essentially a nonparametric correction of the parametric conditional covariance function the analysis focuses on price links between crude oil ethanol and sugar prices in brazil results suggest strong volatility links between the prices studied parametric approximations of the conditional covariance matrix may lead to misleading results that can be improved upon by using nonparametric techniques

enforcement and price controls in emissions trading this paper examines how enforcement affects the structure and performance of emissions trading programs with price controls under uncertainty about firms abatement costs the analysis highlights how an enforcement strategy can cause abatement cost risk to be transmitted to enforcement costs via the price of permits when this occurs accommodating the effect of abatement cost risk with an optimal policy results in higher expected emissions and lower expected permit price than their second best optimal values however it is possible to design an enforcement strategy that shields enforcement costs from abatement cost risk by tying sanctions directly to permit prices this enforcement strategy stabilizes enforcement effort the optimal permit supply and price controls are independent of enforcement costs and the policy produces the second best optimal outcome

zipf s law for cities an explanation zipf s law is a very tight constraint on the class of admissible models of local growth it says that for most countries the size distribution of cities strikingly fits a power law the number of cities with populations greater than s is proportional to 1 s suppose that at least in the upper tail all cities follow some proportional growth process this appears to be verified empirically this automatically leads their distribution to converge to zipf s law

volatility spillovers for spot futures and etf prices in agriculture and energy abstract the agricultural and energy industries are closely related both biologically and financially the paper discusses the relationship and the interactions on price and volatility and on the covolatility spillover effects for these two industries the interaction and covolatility spillovers or the delayed effect of a returns shock in one asset on the subsequent volatility or covolatility in another asset between the energy and agricultural industries is the primary emphasis of the paper although there has already been significant research on biofuel and biofuel related crops only a few published papers have been concerned with volatility spillovers it must be emphasized that there have been numerous technical errors in the theoretical and empirical research which need to be addressed the paper considers futures prices as a widely used hedging instrument and also considers an interesting new hedging instrument etf which is regarded as index futures when investors manage their portfolios in the empirical analysis multivariate conditional volatility diagonal bekk models are estimated for comparing patterns of covolatility spillovers the paper provides a new way of analyzing and describing the patterns of covolatility spillovers which should be useful for the future empirical analysis of estimating and testing covolatility spillover effects

u s farm policy and the volatility of commodity prices and farm revenues a dynamic three commodity rational expectations storage model is used to compare the impact of the federal agricultural improvement and reform fair act of 1996 with a free market policy and with pre fair policies results suggest that fair did not lead to significant increases in long run price volatility or revenue volatility the main impact of pre fair relative to the free market regime was to substitute government storage for private storage in a way that did little to support prices or to stabilize farm incomes results also indicate that u s grain market volatility in 1995 2000 was due to fundamental market forces and not to fair copyright 2002 oxford university press

volatility spillovers for energy prices a diagonal bekk approach abstract we examine the relationship between return and volatility as well as the covolatility spillover for energy foreign currency and stock markets using the diagonal bekk model using daily crude oil natural gas and the coal prices as proxies for energy prices the s p500 index as a proxy for the u s stock market and the eur usd exchange rate as a proxy for the exchange rate we find robust evidence for the volatility spillover effects among the three markets also in the 16 out of 20 pairwise relationships in the five markets there are significant negative covolatility spillover effects in the four pairs involving coal there are positive and significant covolatility spillover effects we conclude that the energy markets and the stock market have stronger covolatility spillovers than others

enforcement costs and the choice of policy instruments for controlling pollution i introduction when evaluating policy instruments for controlling pollution analysts generally agree that economic incentives are superior to direct controls in terms of minimizing abatement costs however when it comes to minimizing enforcement costs there is no such agreement some analysts such as freeman et al 1973 and anderson et al 1977 argue that economic incentives would be much easier to enforce than direct controls while others such as drayton 1978 argue that they would be virtually unenforceable the debate typically centers on technical difficulties in continuously monitoring emissions and to a lesser extent on political and legal issues related to the assessment of penalties 1 an issue that has not been examined is whether there are economic reasons for enforcement costs to vary across policy instruments although there is now a sizable economic literature on the problem of noncompliance with pollution control policies there have been no attempts to formally compare enforcement costs across policy instruments 2 accordingly the purpose of this note is to examine whether there are economic grounds for arguing that enforcement costs would be lower for economic incentives than direct controls 3 the policy instruments compared are marketable permits or emissions taxes and uniform standards the instruments are compared in a setting where the penalty schedule is previously specified by some judicial or legislative body and the regulator s enforcement policy is limited to the choice of audit frequency the analysis is based on the premise that for any policy instrument that targets emissions the regulator will have to periodically monitor emissions and assess penalties for noncompliance the relevant question then is whether less frequent monitoring would be required to ensure compliance with economic incentives casual analysis suggests this should be the case economic incentives minimize aggregate abatement costs and lower abatement costs imply lower costs to firms of complying this should imply in turn that less stringent enforcement is needed to achieve compliance this argument although intuitively appealing is flawed using a simple model of pollution control with costly enforcement i show that enforcement costs narrowly defined may be higher for economic incentives for purposes of exposition the result is established in a setting where the regulator ensures each firm is fully compliant however as shown in the appendix the result generalizes to the more realistic setting where firms are partially compliant ii the model consider a group of n risk neutral firms emitting a single pollutant for simplicity the damages from the pollutant are assumed to depend only on total emissions each firm s abatement costs are given by a strictly convex function c sub i x sub i that is decreasing in emissions x sub i the firm s maximum emissions level is denoted mathematical expression omitted and is defined by mathematical expression omitted with probability p sub i a regulator audits each firm and measures its emissions if the regulator finds the firm s actual emissions x sub i exceed its allowed emissions s sub i the firm is assessed a fine of f x sub i s sub i as is common in the literature on enforcement i assume the fine schedule is previously specified e g by a legislative body 4 thus the regulator can choose the probability with which it audits firms but not the fine it assesses for noncompliance i assume the fine schedule is such that both the total fine and marginal fine are increasing in the violation size x sub i s sub i f prime is greater than 0 and f prime prime is grater than 0 because the regulator is assumed to ensure full compliance no violations occur and no fines are collected therefore enforcement costs consist solely of auditing or monitoring costs to simplify the analysis the cost of conducting an audit a is assumed to be the same across firms

the cost effective choice of policy instruments to cap aggregate emissions with costly enforcement we study the cost effectiveness of inducing compliance in a program that caps aggregate emissions of a given pollutant from a set of heterogeneous firms based on emissions standards and the relative cost effectiveness of such a program with respect to an optimally designed program based on tradable discharge permits our analysis considers abatement monitoring and sanctioning costs as well as perfect and imperfect information on the part of the regulator with regard to the polluters abatement costs under perfect information we find that a the total cost effective design of a program based on standards is one in which the standards are firm specific and perfectly enforced and b the total cost of an optimally designed program based on standards is lower than the total cost of an optimally designed transferable emission permits system except under special conditions this is true when it is optimum to induce perfect compliance and when it is not under imperfect information nevertheless it is only by implementing a system of tradable permits and perfectly enforcing it with a constant marginal penalty tied to the price of the permits that the regulator can surmount the informational problem and at the same time minimize the total cost of the program with certainty

do we really need both bekk and dcc a tale of two multivariate garch models the management and monitoring of very large portfolios of financial assets are routine for many individuals and organizations the two most widely used models of conditional covariances and correlations in the class of multivariate garch models are bekk and dynamic conditional correlation dcc it is well known that bekk suffers from the archetypal curse of dimensionality whereas dcc does not it is argued in this paper that this is a misleading interpretation of the suitability of the two models for use in practice the primary purpose of this paper is to analyse the similarities and dissimilarities between bekk and dcc both with and without targeting on the basis of the structural derivation of the models the availability of analytical forms for the sufficient conditions for existence of moments sufficient conditions for consistency and asymptotic normality of the appropriate estimators and computational tractability for ultra large numbers of financial assets based on theoretical considerations the paper sheds light on how to discriminate between bekk and dcc in practical applications

using taxes to deter illegal fishing in itq systems we study the effects of different tax schemes used in fisheries management in combination with an individual transferable quota system we focus on the effects of taxes on equilibrium quota prices and on violations under the assumption that enforcement to induce compliance is imperfect and costly the use of taxes is motivated by the regulator s need to recover costs for enforcement activities we propose the use of a tax on the price of the processed products based on its impact on violations and the information that is required to implement it we also show that this tax has a double pay off for enforcement because it reduces the demand for illegal fishing and increases revenue for enforcement activities without producing a deadweight loss in the quota market we present an application of our model to the case of the red shrimp fishery in chile in our simulation example a tax of 7 on the price of fish exports could sufficiently reduce harvest demand and generate enough funding to completely eliminate quota violations which in the absence of taxes can be more than 100 of the total allowable catch at the same time this tax could increase the equilibrium quota price by 19

volatility spillover between oil and agricultural commodity markets abstract this study examines volatility transmission between oil and selected agricultural commodity prices wheat corn soybeans and sugar we apply the newly developed causality in variance test and impulse response functions to daily data from 01 january 1986 to 21 march 2011 in order to identify the impact of the food price crisis the data are divided into two sub periods the pre crisis period 01 january 1986 to 31 december 2005 and the post crisis period 01 january 2006 21 march 2011 the variance causality test shows that while there is no risk transmission between oil and agricultural commodity markets in the pre crisis period oil market volatility spills on the agricultural markets with the exception of sugar in the post crisis period the impulse response analysis also indicates that a shock to oil price volatility is transmitted to agricultural markets only in the post crisis period this paper thereby shows that the dynamics of volatility transmission changes significantly following the food price crisis after the crisis risk transmission emerges as another dimension of the dynamic interrelationships between energy and agricultural markets

ethanol and trade an analysis of price transmission in the us market abstract this paper examines the price transmission mechanisms between domestic ethanol and imported ethanol in the us market using a multivariate johansen approach the data and model support one cointegrating relationship between the prices of domestically produced ethanol imported ethanol and other relevant products gasoline crude oil and corn the rejection of weak exogeneity of the imported ethanol price and corn price implies that these two prices would adjust to changes in the price linkage those empirical findings indicate that the impact of eliminating trade barriers on the imported ethanol price would spillover to the domestic ethanol price and subsequently to corn price

urban concentration agglomeration economies and the level of economic development there is a view among planners in the developing nations that the process of economic development invariably results in the concentration of population in one or two primal cities there is also however considerable disagreement over whether this apparent relationship is either necessary or desirable proponents on the one hand argue that concentrated urbanization strongly supports industrial development through the realization of scale and agglomeration economies 2 dissenters from this view feel that urban concentration creates serious social costs and results more from historical or political forces than economic ones in this case policies aimed at decentralizing growth can achieve social objectives without sacrificing economic efficiency despite these deliberations it is surprising that there has been little or no empirical study of urban concentration on either a longitudinal or cross national basis the major related work which exists is williamson s research on economic development and income inequality 3 williamson demonstrates that as economic growth begins inequality initially increases but then diminishes in the more advanced stages of development this coincides with hirschman s4 view that industrialization eventually spreads into more backward areas reduc

to comply or not to comply pollution standard setting under costly monitoring and sanctioning in this paper we characterize optimal regulatory policies composed of a pollution standard a probability of inspection and a fine for non compliance in a context where both monitoring and sanctioning are socially costly and the penalty may include gravity and non gravity components at the regulator s discretion under given penalties the optimal policy entails compliance with the standard as long as a quite intuitive condition is met non compliant policies may include standards even below the pollution levels that minimize the sum of abatement costs and external damages interestingly the appropriate structure of the penalty under non compliance is highly progressive while the best possible shape of the fine under compliance is linear if the regulator is entitled to choose the structure of the fine linear penalties are socially preferred and the optimal policy induces compliance

environmental enforcement when inspectability is endogenous a model with overshooting properties if a firm can influence its monitorability vis a vis an environmental regulator it is shown that increasing the thoroughness of inspections induces the firm to substitute towards more transparent technologies whilst increasing their frequency may cause substitution the other way perversely when the effect of such substitution is taken into account an increase in the frequency of inspections or equally the stringency of penalties may worsen the firm s environmental performance the agency should favour more thorough inspections than existing theory suggests particularly in sectors where the scope for such substitution is great moreover when monitorability adjusts only sluggishly to policy shocks because it is an embodied characteristic of capital for example the environmental impacts of increased frequency and increased thoroughness well over and under shoot their respective long run impacts in assessing regulatory reform therefore it is important to leave sufficient time for the class of adjustments identified to occur the possibility of overshooting can be used as an alternative to existing regulatory capture theories to explain why the efficacy of some classes of regulatory reform may fade through time

the impact of biofuel growth on agriculture why is the range of estimates so wide the rapid expansion of biofuel production has generated considerable interest within the body of empirical economic literature that has sought to understand the impact of biofuel growth on the global food economy while the consensus within the literature is that biofuel emergence is likely to have some effect on future world agricultural market there is a considerable range in the estimated size of the impact despite the importance of this topic to policy makers there has been no study that has tried to reconcile the differences among various outlook studies this paper undertakes an in depth review of some key outlook studies which quantify the impacts of biofuels on agricultural commodities and which are based on either general equilibrium ge or partial equilibrium pe modeling approaches we attempt to reconcile the systematic differences in the estimated impacts of biofuel production growth on the prospective prices and production of three major feedstock commodities maize sugar cane and oilseeds across these studies despite the fact that all models predict positive impacts on prices and production there are large differences among the studies our findings point to a number of key assumptions and structural differences that seem to jointly drive the variations we observe across these studies the differences among the pe models are mainly due to differences in the design of scenarios the presence or absence of biofuel trade and the structural way in which agricultural and energy market linkages are modeled the differences among the ge models are likely to be driven by model assumptions on agricultural land supply the inclusion of the byproducts and assumptions on crude oil prices and the elasticity of substitution between petroleum and biofuels