impacts of opec s political risk on the international crude oil prices an empirical analysis based on the svar models abstract the impacts of opec s political risk on the fluctuations of international crude oil prices have caused widespread concern and analyzing the impacts is of great significance to the investment decisions and risk aversion strategies in the crude oil markets therefore using the international country risk guide icrg index as a proxy for the countries political risk situation we empirically investigate the impacts of opec s political risk on the brent crude oil prices based on several structural vector autoregression svar models the main empirical results indicate that 1 the political risk of opec countries does have a significant and positive influence on brent crude oil prices in the sample period from january 1998 to september 2014 and the most significant positive influences appear in about one and a half year and last about a year 2 opec s integrated political risk contributes to 17 58 of the oil price fluctuations in the sample period which is only lesser than that of the oil demand shocks 34 64 3 compared with the political risk of opec countries in north africa and south america the political risk of opec countries in the middle east contributes most to the oil price fluctuations 4 among the eight components of the political risk in opec the internal conflicts contribute most to the oil price fluctuations in the sample period

efficient diversification according to stochastic dominance criteria this paper develops the first operational tests of portfolio efficiency based on the general stochastic dominance sd criteria that account for an infinite set of diversification strategies the main insight is to preserve the cross sectional dependence of asset returns when forming portfolios by reexpressing the sd criteria int dimensional euclidean space with elements representing rates of return int different states of nature we characterize subsets of this state space that dominate a given evaluated return vector by first and second order sd this allows us to derive simple sd efficiency measures and test statistics computable by standard mathematical programming algorithms the sd tests and efficiency measures are illustrated by an empirical application that analyzes industrial diversification of the market portfolio

p e forwards and their orbits from a theoretical viewpoint earnings growth that follows the consensus should all else being equal result in rising or falling p es that provide the equity investor with the price appreciation needed to just meet the market s total return expectation for a given earnings growth rate this expectational equilibrium should move a fairly priced p e toward a sequence of forward values that ultimately trace out an implied p e orbit for two phase models with the typically higher level of first phase growth the p e orbit will trace a smooth year by year descent from the starting p e to the terminal second phase p e these descending forward p es provide a baseline that represents the inertial pricing paths implied by an unaltered consensus analysts who assign p e estimates that diverge from this baseline path presumably believe that they have special insights that justify such a departure from the consensus implied level awareness of the p e orbit concept should help analysts avoid falling for the cl

is the entropy law relevant to the economics of natural resource scarcity abstract nicholas georgescu roegen and herman daly have argued that the entropy law imposes an absolute resource scarcity which cannot be overcome with technological change exploration or substitution on the contrary this paper argues that their critique is fundamentally flawed the pessimistic scenario requires a concept of materials entropy which is highly problematic materials entropy cannot be defined independently of technology and it is impossible to aggregate over different types of materials to meaningfully talk about available versus unavailable matter in the aggregate failing a concept of materials entropy the critique fails since the earth is not closed with respect to energy

cost effective compensation to avoid carbon emissions from forest loss an approach to consider price quantity effects and risk aversion abstract analyses were carried out on financial compensation to avoid loss of tropical forests and related carbon c emissions when marginal financial yield declined for land use options with extended areas and when a risk averting perspective modeled according to financial theory around the capital asset pricing model is assumed the approach in this study was to consider natural forest forest plantation pasture and cropland simultaneously to investigate how an optimized land use distribution may reduce the amount of compensation necessary to avoid c emissions from forest loss the financial compensations derived were as high as us 176 per hectare per year when comparing natural forests only with the most profitable alternative croplands however compensation decreased to us 124 for risk neutral decision makers who would strive for optimized land use allocation and to only us 47 per hectare per year for risk avoiders who would look to maximize the reward to variability ratio sensitivity analyses indicated that the compensation under risk aversion increased much less than under risk ignoring when increased productivity of agricultural land use or growing demand for agricultural products was simulated it was concluded that considering appropriate diversification strategies and the well documented human behavior to avoid risks is an important step in developing cost effective compensation policies

eco thermodynamics economics and the second law the laws of physics especially the first and second laws of thermodynamics have significant implications for economic theory the major implications of the first law conservation of mass energy are straightforward and have been discussed at length elsewhere in brief raw material inputs to economic processes are not consumed having been extracted from the environment in the first place they eventually return to the environment as wastes the economic implications of the second law entropy law are far more subtle there is considerable literature initiated by the work of georgescu roegen on the supposed constraints on economic growth imposed by the fact that economic processes utilize low entropy raw materials fossil fuels and high grade metal ores and discard high entropy wastes however as a practical matter the flux of available low entropy energy exergy from the sun is extremely large and certainly adequate to sustain economic activity in the solar system indefinitely even though fossil fuel and metal ore stocks may eventually be exhausted it is argued in this paper that the real economic significance of the second law lies in the fact that exergy is i not conserved and ii is a useful common measure of resource quality as well as quantity applicable to both materials and energy thus exergy can be used to measure and compare resource inputs and outputs including wastes and losses this is potentially important in itself moreover since exergy is not conserved it is truly consumed i e used up in economic processes hence exergy is no less a factor of production than labor or capital this fact has strong implications for economic growth theory especially with regard to assessing the role of technical progress

gold and crude oil prices after the great moderation abstract previous studies have reported that gold prices and crude oil prices seem to be related with causality generally running from oil prices to gold prices this paper revisits the question using non linear threshold cointegration methods it examines how a shock to oil prices affects gold prices with the impacts shown to depend on both the size of the shock and the region within which the system lies when the shock occurs this simple yet novel result helps to explain why earlier studies found conflicting evidence on whether gold and crude prices share a long run relationship the empirical findings also suggest that energy policies should not be designed without consideration for their interaction with financial policies

entropy and economic processes physics perspectives this paper is a contribution to the discussion on the relation between thermodynamics and economic theory with respect to thermodynamic constraints on the economy there are two diametrically opposite positions in this discussion one claims that the constraints are insignificant of no immediate practical importance for modelling and in the intermediate run do not limit economic activity and therefore need not be incorporated in the economic theory the other holds that thermodynamics tells us that there are practical limits to materials recycling which already puts bounds on the economy and therefore must be included in the economic models using the thermodynamic concept of entropy we show here that there are fundamental problems with both positions even in the long run entropy production associated with material dissipation need not be a limiting factor for economic development abundant energy resources from solar radiation may be used to recover dissipated elements with simple quantitative analysis we show that the rate of entropy production caused by human economic activities is very small compared to the continuous natural entropy production in the atmosphere and on the earth s surface further the societal entropy production is well within the range of natural variation it is possible to replace part of the natural entropy production with societal entropy production by making use of solar energy society consumes resources otherwise available for coming generations however future generations need not have less resources available to them than the present generation human industrial activities could be transformed into a sustainable system where the more abundant elements are industrially used and recycled using solar energy as the driving resource an economic theory fit to guide industrial society in that development must not disregard thermodynamics nor must it overstate the consequences of the laws of thermodynamics 2001 elsevier science b v all rights reserved

the inada conditions for material resource inputs reconsidered it is shown that the thermodynamic law of conservation of mass the so called materials balance principle implies that the marginal product as well as the average product of a material resource input are bounded from above this means that the inada conditions one of the standard assumptions of economic growth theory when applied to material resource inputs are inconsistent with a basic law of nature the analysis is based on a model of multi level production where intermediate goods are produced from elementary resources and an all purpose final commodity is produced from these intermediates

timber harvesting versus forest reserves producer prices for open use areas in german beech forests fagus sylvatica l abstract a strong demand for nature conservation can be ascertained in germany several nature conservation groups argue that in order to provide nature conservation in considerable parts of the forest area forestry should sacrifice timber harvesting for example the abandoning of harvesting altogether is supposed to enhance and protect the species richness this fact and the very low profitability of forestry in germany motivated the writing of this paper the paper explains a methodology for deriving producer prices involved in forest reserves where harvest benefits are sacrificed totally such methodology can be useful to form a basis for private contracts between forest owners and nature conservationists who demand forest reserves the results of this methodology can also be integrated in financial programs for species and habitat conservation in a basic theoretical consideration it is demonstrated that a stand by stand evaluation approach may only serve as an initial step in deriving compensation prices for forest reserves due to the stochastic character of forest management a nonlinear programming approach nlp was adopted to find an optimal operational plan for a hypothetical beech fagus sylvatica l forest in both the constraints and the objective function the nonlinearity is considered by integrating stochastic components additionally only virtual homogenous forest reserves are considered firstly a basic nlp solution for the hypothetical forest with the objective maximise the net present value npv of timber harvests adjusted to risk was obtained when considering several constraints subject to stochastic variation of net revenues and timber harvests without considering forest reserves secondly other solutions allowing for forest reserves were computed the decrease of the objective function when forest reserves were increased in periodic increments seemed well suited to mirror the opportunity costs of forest reserves the results showed that a stand by stand approach gave much greater compensation prices than the nlp approach the reason for this lay in the consideration of a nonlinear objective function as well as the nonlinear constraints in the case of nlp the first 42 ha forest reserve was priced at 11 494 euro ha or 483 euro ha year expressed in infinite yearly compensation the yearly compensation price for the last forest reserve had an increase up to 607 euro ha year a stand by stand approach however resulted with compensation prices from minimally 609 up to maximally 709 euro ha year various interest rates 3 2 and 5 2 caused different compensation price curves the slope of the curves increased when the interest rate decreased the limits of the approach the problem of deriving a demand for forest reserves and the opportunities for applying the presented approach to state forests are discussed

mixed forests and finance methodological approaches abstract mixed forest ecosystems show effects of risk compensation similar to diversified portfolios of stocks other than portfolios of stocks the composition of long lived forests cannot be adjusted at short notice to current market developments thus the financial robustness of tree species portfolios is very important however it is still an open question which financial approaches are appropriate to evaluate the financial robustness of mixed forests compared to single species forests this paper analysed various possibilities to assess portfolios of tree species namely the mean variance mv approach applied for the selection of optimal portfolios the second order stochastic dominance ssd criterion and the information gap approach for the numerical analysis existing financial data on norway spruce picea abies l karst and european beech fagus sylvatica l were used which were generated by monte carlo simulations mcs under risk regardless of the analysed approach in all cases pure forests did not outperform mixed forests the mv approach was restricted by the assumption of normally distributed financial returns it had the tendency to favour larger proportions of the high risk species norway spruce ssd was only able to distinguish between the efficient and the inefficient portfolios it showed that forests with less than 20 financial returns generated by mcs or less than 30 normally distributed financial returns of norway spruce were inefficient under information gap modelling the advantages of risk compensation in mixed forests became clearest under the given assumptions the financial robustness of a mixed forest 50 european beech and 50 norway spruce was between 4 and 18 times greater than that of pure norway spruce modern information gap modelling is very similar to the well known safety first rules and as such it is not that novel to financial optimisation as it seems at the first glance although the information gap theory resulted in the same rankings as the minimisation of the estimated probability of failure it nevertheless proved to be useful as a supplement to the other methods against the background of severe uncertainty inherent in long term decision making in forestry information gap modelling is based on appropriate assumptions it favours a decision which promises the greatest tolerance to possible errors in the available information while still guaranteeing a minimal acceptable financial result in principle classical safety first rules do the same however the information gap model is able to quantify the immunity of a decision against errors in the estimated financial data from a theoretical point of view this approach provides a supplementary and methodologically sound opportunity to incorporate severe uncertainty in decision making

entropy limits to growth and the prospects for weak sustainability in this paper we analyze the consequences of mass and energy conservation and the second law of thermodynamics for economic activity in contrast to former studies we deduce our results formally from a general model of production and consumption we show that in a static setting for economies containing irreversible processes a non zero resource input as well as non zero emissions are necessary to sustain a positive level of consumption we generalize this result to a dynamic setting and apply it to the growth discussion and the sustainability discourse thereby we show that limits to growth of production and consumption are likely to exist and that the concept of weak sustainability is either morally unattractive or physically infeasible d 2005 elsevier b v all rights reserved

making a case for robust optimization models robust optimization searches for recommendations that are relatively immune to anticipated uncertainty in the problem parameters stochasticities are addressed via a set of discrete scenarios this paper presents applications in which the traditional stochastic linear program fails to identify a robust solution despite the presence of a cheap robust point limitations of piecewise linearization are discussed we argue that a concave utility function should be incorporated in a model whenever the decision maker is risk averse examples are taken from telecommunications and financial planning

quantitative versus qualitative growth with recyclable resource we reassess the issue of limits to growth in an endogenous growth model of a decentralized economy where final productions require a recyclable essential material input the model follows a material balance approach and relies on technological assumptions consistent with the material balance principle and on explicit distinction between the material content and the quality of produced goods growth follows from research activities that allow firms to improve the quality of their output and to reduce the material resource intensiveness of their production process even though recycling is assumed perfect we show that 1 the material balance constraint affect the whole transitory dynamics of the growth process 2 quantitative growth i e positive growth of material output can only be a transitory phenomenon long term economic growth taking exclusively the form of perpetual improvements in the quality of final goods a long term growth path is characterized by constant values of material variables or in a less favorable scenario by a constant negative growth rate of those variables we establish the existence conditions of a growth path based on quality improvements and constant material variables it may fail to exist in a decentralized framework even though it is quite feasible from a purely physical point of view

info gap economics an operational introduction yakov ben haim palgrave macmillan 2010 isbn 978 0 230 22804 7 245 pp

pareto optimality and competition there is a general consensus that u s financial markets are very competitive and efficient with prices quickly reflecting the available information there is also a widespread belief that these competitive and efficient markets enable the efficient allocation of scarce capital among alternative investment opportunities this belief is not based on direct observation it is virtually impossible to obtain the data concerning the joint probability distribution of returns to all possible projects which would be required for a direct assessment of the efficiency of the resource allocations to which the market gives rise rather it is based on the well known result that perfectly competitive markets generate pareto efficient resource allocations the object of this paper is to question that conclusion to show that even with apparently competitive and efficient markets resource allocations may not be pareto efficient

portfolio management of wild fish stocks abstract managing fish stocks in terms of a portfolio of economic assets is likely to significantly increase benefits for society relative to single species approaches a portfolio framework systematically combines fish stocks that are joined by ecology e g predation competition and unspecialized fishing technologies e g mixed species trawls into a portfolio which balances expected aggregate returns against the risks associated with stock attribute and other uncertainties to be productive however this framework must be combined with property rights institutions that clearly state management objectives create long run time horizons among harvesters internalize spillovers caused by ecological and technological jointness and reduce uncertainty through research and adaptive management although the cost of reducing scientific uncertainty about ecological interactions may limit the portfolio approach to intensive management of relatively few species its scope can be broadened to integrate tradeoffs among more types of marine resources such as nature preserves and oil and gas deposits

cointegration and threshold adjustment this article proposes an extension to the engle granger testing strategy by permitting asymmetry in the adjustment toward equilibrium in two different ways we demonstrate that our test has good power and size properties over the engle granger test when there are asymmetric departures from equilibrium we consider an application namely whether there exists cointegration among interest rates for instruments with different maturities this issue has been widely tested with mixed results we argue that either cautious policy or possibly opportunistic behavior on the part of the federal reserve implies that an equilibrium relationship between short and long term interest rates exists but that adjustments from disequilibrium are asymmetric in nature empirical tests using u s yields confirm the asymmetric nature of error correction among interest rates of different maturities

optimizing agricultural land use portfolios with scarce data a non stochastic model the theory of portfolio selection has often been applied to help improve economic decisions about the environment applying this theory requires information on the covariance of uncertain returns between all combinations of the economic options and also assumes that returns are normally distributed as it is usually difficult to fulfill all data requirements and assumptions this paper proposes a variant of robust portfolio optimization as an alternative that needs less pre information the approach considers future uncertainties in a non stochastic fashion through possible deviations from the nominal return of land use alternatives maximizing the economic return of the land use portfolio is conditional on meeting an inclusive set of constraints these demand that a pre defined return threshold is achieved by the robust solution for each uncertainty scenario considered based on data for eight agricultural crops common in the ecuadorian lowlands a comparison with portfolios generated by classical stochastic mean variance optimization shows greater land use diversification through increased shannon indices but only moderate expected economic loss of non stochastic robust land use portfolios we conclude that non stochastic derivation of land use portfolios is a good alternative to the classical stochastic model in situations where information on economic input parameters is scarce

efficient algorithms for stochastic dominance tests based on financial market data it is known that when the random variables being compared have a uniform probability measure as is the case when using financial market data the computation of efficient sets for first and second degree dominance can be greatly simplified if majorization conditions are used instead of the dominance definitions this paper presents an equally efficient technique for third degree dominance

further evidence of an environmental kuznets curve in spain abstract using a long span of data in spain esteve and tamarit 2012b reported evidence of a strong link between per capita income and per capita co2 in this paper we extend their work finding evidence of both non linear cointegration and asymmetric adjustment using a novel approach due to sephton 1994 and sephton and mann 2012 the results suggest that there is a long run non linear attractor drawing per capita income and co2 levels together with asymmetric adjustment

is the entropy law relevant to the economics of natural resource scarcity comment abstract jeffrey t young s critique of the work of nicholas georgescu roegen and herman e daly questions the relevance of the entropy law for economic analysis and provides a concise faithful summary of the positions of georgescu roegen and daly along the way however young produces an alternative model of natural resource depletion that is based upon questionable interpretations of the laws of thermodynamics in particular young s claim that natural resource economics can be divided into conservation law orientations and entropy law orientations and his claim that the entropy law pertains to energy but not to matter seem unsupportable from a scientific view

the extraction of natural resources the role of thermodynamic efficiency abstract the modelling of production in microeconomics has been the subject of heated debate the controversial issues include the substitutability between production inputs the role of time and the economic consequences of irreversibility in the production process a case in point is the use of cobb douglas type production functions which completely ignore the physical process underlying the production of a good we examine these issues in the context of the production of a basic commodity such as copper or aluminium we model the extraction and the refinement of a valuable substance which is mixed with waste material in a way which is fully consistent with the physical constraints of the process the resulting analytical description of production unambiguously reveals that perfect substitutability between production inputs fails if a corrected thermodynamic approach is used we analyze the equilibrium pricing of a commodity extracted in an irreversible way we force consumers to purchase goods using energy as the means of payment and force the firm to account in terms of energy the resulting market provides the firm with a form of reversibility of its use of energy under an energy numeraire energy resources will naturally be used in a more parsimonious way

conservation payments under risk a stochastic dominance approach conservation payments can be used to preserve forest and agroforest systems to explain landowners land use decisions and determine appropriate conservation payments it is necessary to focus on revenue risk marginal conditional stochastic dominance rules are used to derive conditions for determining the conservation payments required to guarantee that the environmentally preferred land use dominates an empirical application to shaded coffee protection in the biologically important choco region of west ecuador shows that conservation payments required for preserving shaded coffee areas are much higher than those calculated under risk neutral assumptions further the extant distribution of land has strong impacts on the required payments

option pricing in a lognormal securities market with discrete trading abstract this paper derives a call option valuation equation assuming discrete trading in securities markets where the underlying asset and market returns are bivariate lognormally distributed and investors have increasing concave utility functions exhibiting skewness preference since the valuation does not require the continouus time riskfree hedging of black and scholes nor the discrete time riskfree hedging of cox ross and rubinstein market effects are introduced into the option valuation relation the new option valuation seems to correct for the systematic mispricing of well in and well out of the money options by the black and scholes option pricing formula

entropy and natural resource scarcity a reply to the critics abstract the paper reaffirms the author s view that entropy is not relevant to the economics of natural resource scarcity once system boundaries are carefully defined entropic considerations are either already incorporated into relative price information or represent such a long run constraint as to be irrelevant to foreseeable human welfare while matter and energy both undergo entropic dissipation it is argued there is an asymmetry in that energy can be imported to recycle matter but the converse importing matter to recycle energy is pure science fiction therefore an open system such as the earth can maintain any level of organization

a standard measure of risk and risk value models in this paper we propose a standard measure of risk that is based on the converted expected utility of normalized lotteries with zero expected values this measure of risk has many desirable properties that characterize the notion of risk it is very general and includes many previously proposed measures of risk as special cases moreover our standard measure of risk provides a preference based and unified method for risk studies since the standard measure of risk is compatible with the measure of expected utility it can be used explicitly or implicitly in an expected utility model under a condition called risk independence a decision could be made by explicitly trading off between risk and value which offers an alternative representation of the expected utility model named the standard risk value model finally we discuss some other applications of the standard measure of risk and extensions of our risk value tradeoff framework for descriptive decision making

a total differential approach to equity duration most of the risk associated with fixed income price movements is accounted for by their duration that is their sensitivity to changes in the discount rate thus for bonds duration and interest rate sensitivity are virtually synonymous for equities however duration is only one of several factors describing risk a major source of confusion in evaluating equity duration is the definition of duration itself measured as a function of the sensitivity of stock price to the discount rate ignoring all links between the discount rate and the growth rate the traditional dividend discount model ddm duration is long 20 years or more but this measure of duration fails to take into account the offsetting effects of inflation induced rate increases on corporate profits a measure of the total sensitivity of stock prices to interest rate movements recognizes that the two components of nominal interest rates inflation and the real rate affect both the equity discount rate and the equity earnings growth rate but not necessarily in the same direction the stock market as a whole is less sensitive to changes in inflation expectations than to changes in real rates because most companies can raise prices hence nominal growth rates in times of inflation thus a measure of stock price total sensitivity to interest rates will generally be substantially shorter than the duration measure derived from the traditional ddm

conservation of mass and instability in a dynamic economy environment system abstract this paper considers a variant of the neumann leontief sraffa general equilibrium models in the context of a jointly determined economy environment system subject to a conversation of mass condition it shows that the conservation of mass contradicts the free disposal free gifts and non innovation assumptions of such models that an expanding economy will be associated with continuous disequilibrating change in the material transformations of both economy and environment and that this change is uncontrollable through the price system

empirical tests for stochastic dominance efficiency we derive empirical tests for the stochastic dominance efficiency of a given portfolio with respect to all possible portfolios constructed from a set of assets the tests can be computed using straightforward linear programming bootstrapping techniques and asymptotic distribution theory can approximate the sampling properties of the test results and allow for statistical inference our results could provide a stimulus to the further proliferation of stochastic dominance for the problem of portfolio selection and evaluation using our tests the fama and french market portfolio is significantly inefficient relative to benchmark portfolios formed on market capitalization and book to market equity ratio

optimizing the shares of native tree species in forest plantations with biased financial parameters abstract addressing uncertainty is a key requirement to follow the principle of precaution in sustainable ecosystem management the maximization of worst case outcomes according to the maximin decision rule based on the two parameters mean and variance of a financial indicator is a prominent approach to integrate uncertainty in decision making in forestry the problem of selecting the optimum tree species combination for a forest plantation investment can be seen as a problem of optimal portfolio selection to be solved according to the maximin decision rule yet it is well known that portfolios computed from expected means and variances are highly sensitive to changes in the estimated parameters the financial results may be poor if we rely too much on the historical data this paper tests an extended worst case model that considers a lower bound for the expected mean net present value npv of a tree species portfolio and an upper bound for its variance biased expected mean npvs variances and correlations for the tree species picea abies l karst spruce and fagus sylvatica l beech were used to test the variability of the resulting tree species portfolios 27 scenarios a comprehensive simulated data set which was adopted from an existing study and defined as the independent reference served to evaluate the financial performance of the tree species portfolios obtained from optimization with the biased data compared with the results of classical worst case optimization instances it was feasible to reduce the variability of tree species shares effectively when the optimization was carried out with the extended worst case approach furthermore the financial performance of this approach was better when tested with the independent data the worst case forest npvs achieved with the extended approach were on average 10 statistical confidence 0 95 or 147 statistical confidence 0 99 greater in comparison to the results of the classical approach the influence of the uncertainty parameter selection was tested and the results were discussed against the controversial viewpoints on the usefulness of the information gap decision theory finally the significance of our results for sustainable ecosystem management is pointed out

spread driven dividend discount models a key determinant of shareholder value is the franchise spread the company s incremental return on new investments over the cost of capital explicitly incorporating this spread into the valuation process paves the way for a more compact two parameter formulation of the standard three parameter dividend discount model this transformation leads to a number of interesting implications in particular the spread driven representation of the ddm 1 clarifies the role of growth driven roes versus the role of spread driven roes 2 facilitates the development of two phase models that reflect a typical company s earnings pattern 3 shows how earnings growth and franchise spreads can underpin a wide range of p e levels 4 addresses the problem of artificially high p es being forced by low estimates for the risk premium and or the inflation rate 5 provides a useful expression for the growth rate of shareholder value and 6 under certain stability conditions leads to a pro forma equity duration that i

franchise valuation under q type competition when considering a company s prospects analysts often segment the earnings progression either formally or intuitively into a series of growth phases followed by a relatively stable terminal phase this study focuses on the role of competition in the terminal phase in the simplified two phase model of a single product company the first phase earnings growth drives the company s overall return on equity toward the generally higher incremental roe on new investments the company then enters the terminal phase with a high roe that attracts the attention of a potential competitor that can replicate the company s production distribution capacity at some multiple q of the original capital cost this q type competition can lead to margin erosion and a reduction in earnings as the roe slides to more competitive levels the implication is that unless a company has either the diversity of product service cycles or other special ways to deflect competitive pressures the analyst should address the potentia

total portfolio duration a new perspective on asset allocation the concept of duration has proved to be a valuable tool for gauging the sensitivity of a bond portfolio to movements in interest rates by balancing the duration of a fixed income portfolio against the duration of the stream of liabilities it is funding one creates a portfolio that is immunized against interest rate changes but what if the portfolio contains stocks as well as bonds the interest rate risk of an equity portfolio can be estimated from a measure of the correlation between stock and bonds by using variance parameters routinely used in conventional asset allocation procedures the correlation is used in conjunction with a measure of bond market duration to derive an estimate of the duration of the stock market these durations together with a portfolio s allocations to stocks and bonds and the beta of the stock component may be used to obtain a measure of total portfolio duration what the duration measure tells us in general is that a total portfolio s sensitivity to interest rate mo

georgescu roegen s flow fund theory of production in retrospect abstract this paper provides a synthetic account of georgescu roegen s flow fund theory as a contribution to the history of ecological economics it reconstitutes georgescu roegen s perspective on production and its relationships with other frameworks such as the neoclassical production function and input output tables the overall purpose is to clearly establish the foundations of the flow fund theory and to introduce the research perspectives it opens for ecological economics the paper puts particular emphasis on the relationships between the flow fund framework and two other aspects of georgescu roegen s thought first his methodological perspective on economics and the role of mathematical models allows for a better understanding of the foundations of the flow fund theory second this framework incorporates georgescu roegen s interest in the physical dimension of the economic process and the implications of the laws of thermodynamics overall the paper concludes that the flow fund theory has solid foundations and thus represents a credible alternative to standard theories of production however in order to show how this framework can shed light on contemporary issues in ecological economics more applications are needed especially at the theoretical level the main challenge for future research is to develop such applications while trying to be faithful to the foundations of the flow fund theory

franchise margins and the sales driven franchise value in a global environment any one company s cost advantage from geographical locale cheaper labor or more efficient production sites can always be replicated in time by a sufficiently strong competitor with access to today s free flowing financial markets thus the ultimate key to a superior margin will be price not cost high value firms will be those that can develop and or sustain a sales driven franchise with premium pricing across a range of product markets the incremental pricing margin beyond that available to a new commodity competitor one who would be content to earn only the cost of capital is the franchise margin a sales driven valuation model translates this pricing power into an estimate of capitalized firm value

production consumption and general equilibrium with physical constraints abstract this paper analyzes the consequences of integrating the conservation laws of mass and energy into the microeconomic models of production consumption and general equilibrium we show that abstract models and especially general equilibrium theory are consistent with these physical constraints but most applied and environmental economic models are not we analyze the consequences of physical conservation laws for substitution possibilities and show that these constraints limit the number of independent substitution processes but not the value of the substitution elasticities finally we propose a method for integrating physical constraints into static microeconomic models with a minimum of changes

stochastic dominance and expected utility survey and analysis while stochastic dominance has been employed in various forms as early as 1932 it has only been since 1969 1970 that the notion has been developed and extensively employed in the area of economics finance agriculture statistics marketing and operations research in this survey the first second and third order stochastic dominance rules are discussed with an emphasis on the development in the area since the 1980s

the levered p e ratio a vast literature examines the role of debt in corporate valuation but most of these works proceed from the vantage point of corporate finance i e ascertaining the effects of adding debt to a previously unlevered company the investment analyst however confronts an already levered company with already levered return parameters the analyst s challenge is to estimate the stock s theoretical value by inferring the company s underlying structure of returns this shift in vantage point leads to results about the effect of leverage that are surprisingly different from the results of studies from the corporate finance angle whereas corporate finance studies find only a moderate effect of leverage when viewed from the analyst s perspective a company s value has such a high degree of sensitivity to the leverage ratio that it can significantly alter the theoretical p e valuation moreover from the analyst s vantage point leverage always moves the p e toward a lower value than that obtained from the sta

policy dilemma of innovation an info gap approach abstract new ideas or technologies are often advocated because of their purported improvements on existing methods however what is new is usually less well known and less widely tested than what is old new methods may entail greater unknown dangers as well as greater potential advantages the policy maker who must choose between innovation and convention faces a dilemma of innovation we present a methodology based on info gap robustness to deal with the innovation dilemma we illustrate the approach by examining the policy decisions for managing the light brown apple moth in california

compelling evidence of an environmental kuznets curve in the united kingdom the objective of this paper is to investigate the relationship between per capita emissions hbox co 2 and hbox so 2 and economic growth per capita gdp in the uk using a long span of data this paper examines the existence of a non linear relationship between emissions and economic growth using methods that do not restrict the relationship to be any particular shape the methodology employs instrumental variables in the place of per capita gdp to deal with potential concerns about errors in variables and endogeneity the empirical results provide strong support for the environmental kuznets curve with estimated turning points in 1966 and 1967 for hbox co 2 and hbox so 2 respectively these turning points correspond roughly with the introduction of the clean air act in the uk as well as the reduction in the use of coal as an energy source and together they provide a snapshot of the forces driving the turning points the paper continues by further investigating the temporal behavior of the inverted u shaped relationship the findings indicate that if emissions and per capita gdp deviate from their long run relationship emissions do the heavy lifting to restore the system to equilibrium this result is intuitively pleasing because mitigation is directly affected by legislation as opposed to declining economic growth

the concept of weak sustainability abstract this paper surveys the links between growth theory with exhaustible resources and the concept of weak sustainability it examines the underlying assumptions behind this concept and questions the usefulness of the weak sustainability index as an indicator of sustainable development

revocability and reversibility in societal decision making abstract reversibility and irreversibility are poorly defined in the decision making literature defining reversibility as the ability to maintain and to restore the functional performance of a system is consistent with thermodynamics specification of its crucial terms is case dependent reversibility is coming in degrees from flexibility over rigidity to preclusion with irreversibility as an absolute end further substantiating reversibility considers three variables duration of impacts revoking costs and substitutability substitutability depends on weights assigned to the strict identity or to the functional performance of something valued for given degrees of substitutability revocability of an action is measurable in time dependent revoking costs together with future time and doubt reversibility sets a three dimensional context for societal decision making revealing domes of expanding complexity cost benefit analysis is a useful decision tool at lower complexity but falters at high complexity because there prevail non monetary trade offs a revival and proper use of the concept reversibility are recommended for improved dialog on major societal issues with climate change outstanding as the case where reversibility could turn into absolute irreversibility also shown is the correspondence between reversibility and ecological concepts like resilience lock in tipping points and others

dsge models still useful in policy analysis this paper discusses the usefulness of dsge models in monetary and fiscal policy analysis while the recent crisis has exposed some weaknesses in these models i argue that dsge models currently have few contenders to replace them as core models in the policy process the prominent role for forward looking behaviour and their simplicity make dsge models very suitable for policy analysis in addition dsge models are flexible enough to be used for many purposes while other models are often more limited in terms of the questions they can address as a result i argue that improved dsge models modified to take the lessons of the recent crisis into account will remain as a workhorse tool in many policy institutions for a long time to come

developments in non expected utility theory the hunt for a descriptive theory of choice under risk this article reviews recent developments in the economic theory of individual decision making under risk since the 1950s it has been known that individual choices violate the standard model of expected utility in predictable ways considerable research effort has now been devoted to the project of developing a superior descriptive model following an overview of non expected utility theories which distinguishes between conventional and non conventional approaches the paper seeks to assess these alternative models in terms of empirical success using laboratory and field data and theoretical usefulness the closing sections reflect on some new directions emerging in this literature

georgescu roegen versus solow stiglitz daly is right to be concerned about our society s use of resources environmental degradation and the wasteful use of natural resources or any resources for that matter are of concern daly s tirade concerning our work seems motivated by two concerns a lack of consistency with basic laws of physics and the alleged implication that growth can continue unabated without eventually facing constraints imposed by the limited supply of natural resources part of the problem arises from a lack of understanding of the role of the kind of analytic models that we and others have formulated they are intended to help us answer questions like for the intermediate run for the next 50 60 years is it possible that growth can be sustained what does this possibility entail we write down models as if they extend out to infinity but no one takes these limits seriously for one thing an exponential increase in the population presents almost unimaginable problems of congestion on our limited planet in this intermediate run capital can substitute for natural resources and this is true even though capital itself uses resources more precise machines made out of resources that are relatively abundant can reduce wastage of resources that are relatively scarce technical change some of which is the result of investments in rd and increased efficiency in production may imply less wastage of bauxite and less coal or oil to produce the energy used to make a pound of aluminum or consider the resources that were required to run a regression only a half century ago pounds and pounds of heavy calculating machines replaced by mere ounces of a modern calculator changes in technology also allow us to recycle resources more efficiently so that the amount that is not recaptured for future production may be reduced perhaps the most important question is where does all of this lead us resources are scarce and markets when they function well reflect that scarcity economizing on the use of resources there are important instances especially where the environment and natural resources are concerned where markets do not work well there are for instance the classic problems posed by pollution externalities when markets do not

mean lower partial moment valuation and lognormally distributed returns in this paper we develop a capital asset pricing model in a mean lower partial moment framework specifically we show that when partial moments are computed about the expected risky portfolio return optimal portfolio choice in a mean lower partial framework permits a two fund portfolio separation between a riskless asset and a market portfolio of risky assets in this new framework risk is measured as semideviation for second degree stochastic dominance and semivariance for third degree stochastic dominance further when security returns are lognormally distributed and small risk this new mean lower partial moment valuation specializes to the mean logarithmic variance capital asset pricing model

interactive relationships between crude oil prices gold prices and the nt us dollar exchange rate a taiwan study this investigation examines the correlations of oil prices gold prices and the nt dollar versus u s dollar exchange rate during 2007 09 03 2011 12 28 johansen co integration test var model granger causality test impulse response analysis and variance decomposition method were used to clarify the interactive relationships among the three variables these tests and models show that the oil price gold price and exchange rate remain considerably independent from one another which implies policymakers should consider the separation of energy and financial policies

irreversibility and uncertainty cause an intergenerational equity efficiency trade off abstract two important policy goals in intergenerational problems are pareto efficiency and sustainability i e intergenerational equity we demonstrate that the pursuit of these goals is subject to an intergenerational equity efficiency trade off our analysis highlights two salient characteristics of intergenerational problems and policy i temporal irreversibility i e the inability to revise one s past actions and ii uncertainty of future consequences of present actions in human environment systems we employ a two non overlapping generations model that combines an intragenerational production decision on the use of circulating capital and a non renewable resource with a negative intergenerational externality as an unforeseen contingency if initially unknown problems become apparent and policy is enacted after irreversible actions were taken policy making faces a fundamental trade off between ex post pareto efficiency and sustainability that is one can achieve either one of these two goals but not both

variance vs downside risk is there really that much difference abstract the popularity of downside risk among investors is growing and mean return downside risk portfolio selection models seem to oppress the familiar mean variance approach the reason for the success of the former models is that they separate return fluctuations into downside risk and upside potential this is especially relevant for asymmetrical return distributions for which mean variance models punish the upside potential in the same fashion as the downside risk the paper focuses on the differences and similarities between using variance or a downside risk measure both from a theoretical and an empirical point of view we first discuss the theoretical properties of different downside risk measures and the corresponding mean downside risk models against common beliefs we show that from the large family of downside risk measures only a few possess better theoretical properties within a return risk framework than the variance on the empirical side we analyze the differences between some us asset allocation portfolios based on variances and downside risk measures among other things we find that the downside risk approach tends to produce on average slightly higher bond allocations than the mean variance approach furthermore we take a closer look at estimation risk viz the effect of sampling error in expected returns and risk measures on portfolio composition on the basis of simulation analyses we find that there are marked differences in the degree of estimation accuracy which calls for further research