an examination of the efficiency of the london traded options market this paper examines the pricing of call options on the london traded options market using month end data on 16 companies from april 1978 to july 1983 the black and scholes model is successful in identifying mispriced options and therefore appears to be applicable however the significant profits which can be made from using the model in establishing riskless spreads do not exceed transactions costs the market cannot therefore be said to be inefficient in the narrowly financial sense it remains to investigate whether the very large bid ask spreads on this market which are the major component of transactions costs are actually justified by the risks borne by market makers

the case of co firing the market level effects of subsidizing biomass co combustion abstract biomass combustion in co firing power plants has been treated differently in renewable electricity promoting policy schemes some policy schemes subsidize biomass co combustion while some do not in this study we analyze the impacts of a policy choice on the fuel uses investment decisions co 2 emissions and on the values of renewable electricity promoting policy instruments in particular we look at the impacts of feed in tariff and a subsidy to renewable energy both together with co 2 emissions price we present an electricity and heat market model where all the solid fossil fuel power plants are able to co fire biomass and fossil fuel in the numerical application the model is used to analyze the differences caused by the policy instruments the results show that subsidizing biomass combustion in a co firing power plant decreases the investments in pure renewable technology however the use of solid fossil fuels is not increased significantly also the co 2 intensity levels of electricity production are nearly equal whether biomass co combustion is subsidized or not

the effects of inflation uncertainty on interest rates a nonlinear approach in this article we investigate the effects of inflation variability on short term interest rates within a nonlinear smooth transition regression framework the test results suggest that only the conditional mean of the inflation is a nonlinear process whereas the conditional variance is time variant but linear using the square root of conditional variance as a proxy for inflation risk we estimate fisher equation augmented with inflation risk although the estimated fisher equations suggest that inflation risk reduces short term interest rates we find that the effects of inflation risk on interest rates are regime dependent particularly we find that the negative effects of inflation variability on nominal rates are greater in low inflationary regimes when compared to high inflationary regimes on the other hand it is found that both inflation and inflation uncertainty raise the expected inflation effect

evaluating the impact of three incentive programs on the economics of cofiring willow biomass with coal in new york state abstract plantations of fast growing willow shrubs are being promoted as a source quality biomass feedstock for bioenergy and bioproducts in new york state ny in the near term cofiring of the feedstock in combination with other woody biomass with coal in existing utility power boilers is considered to be the most promising conversion method for energy generation despite the clear technological viability and associated environmental benefits cofiring of willow has not been widely adopted the relatively high production cost of the willow feedstock which is over twice that of coal is the primary reason for this lack of interest taxes that account for some of the social costs of using coal and or incentives that appropriate value for some of the social benefits of using willow are essential for eliminating most or the entire current price differential this paper presents an integrated analysis of the economics of power generation from cofiring willow biomass feedstock with coal from the perspective of the grower aggregator and the power plant emphasis is placed on analyzing the relative impact of a green premium price a closed loop biomass tax credit and payments to growers under the proposed conservation reserve program crp harvesting exemption policy the crp payments reduced the delivered cost of willow by 36 35 to 1 90 gj 1 and 1 70 gj 1 under current and increased yield conditions respectively these prices are still high relative to coal other incentives are required to ensure commercial viability the required levels of green premium price 0 4 1 0 cents kwh 1 and biomass tax credit 0 75 2 4 cents kwh 1 vary depending on whether the incentives were being applied by themselves or in combination and whether current yield or potential increased yields were being considered in the near term cofiring willow biomass and coal can be an economically viable option for power generation in ny if the expected overall beneficial effects associated with the production and use of the biomass is accounted for

the statistical properties of daily foreign exchange rates 1974 1983 abstract this paper examines the statistical properties of daily rates of change of five foreign currencies from 1974 to 1983 the main purpose is to discriminate between two competing explanations for the observed heavy tails of the distribution that the data are independently drawn from a heavy tail distribution which remains fixed over time and that the data come from distributions which vary over time evidence point to the rejection of the first hypothesis further investigations show that the rejection can be attributed to changing means and variances in the data which can be described by a simple statistical model

oil and asset classes implied volatilities investment strategies and hedging effectiveness abstract building on the increased interest in oil prices and other financial assets this paper examines the dynamic conditional correlations among their implied volatility indices we then proceed to the examination of the optimal hedging strategies and optimal portfolio weights for implied volatility portfolios between oil and fourteen asset volatilities which belong to four different asset classes stocks commodities exchange rates and macroeconomic conditions the results suggest that the oil price implied volatility index ovx is highly correlated with the us and emerging stock market volatility indices whereas the lowest correlations are observed with the implied volatilities of gold and the euro dollar exchange rate hedge ratios indicate that vix is the least useful implied volatility index to hedge against oil implied volatility finally we show that investors can benefit substantially by adjusting their portfolios based on the dynamic weights and hedge ratios obtained from the dynamic conditional correlation models although a trade off exists between the level of risk reduction and portfolio profitability

a class of nonlinear arch models a class of nonlinear arch models is suggested the proposed class encompasses several functional forms for arch which have been put forth in the literature a lagrange multiplier test is developed to test engle s arch specification against the wider class of models this test provides an easily computed diagnostic check of the adequacy of an arch model after it has been estimated the theory is applied to a number of weekly exchange rate series and we find strong evidence of nonlinear arch

term structure of interest rates in the singapore asian dollar market this paper investigates empirically the term structure of interest rates in the singapore asian dollar market we consider extended versions of the arch m model of engle lilien and robins 1987 the extended models permit autocorrelation skewness and leptokurtosis in the residuals the robustness of the empirical tests with respect to alternative specifications of the arch process is examined it turns out that there is significant time varying term premium and this conclusion is independent of the hypothesized arch model

predictive ability of asymmetric volatility models at medium term horizons using realized volatility to estimate conditional variance of financial returns we compare forecasts of volatility from linear garch models with asymmetric ones we consider horizons extending to 30 days forecasts are compared using three different evaluation tests with data from an equity index and two foreign exchange returns we show that asymmetric models provide statistically significant forecast improvements upon the garch model for two of the datasets and improve forecasts for all datasets by means of forecasts combinations these results extend to about 10 days in the future beyond which the forecasts are statistically inseparable from each other

a dynamic analysis of interfuel substitution for swedish heating plants abstract this paper estimates a dynamic model of interfuel substitution for swedish heating plants we use the cost share linear logit model developed by considine and mount considine t j mount t d 1984 the use of linear logit models for dynamic input demand systems review of economics and statistics 66 434 443 all estimated own price elasticities are negative and all cross price elasticities are positive the estimated dynamic adjustment rate parameter is small however increasing with the size of the plant and time indicating fast adjustments in the fuel mix when changing relative fuel prices the estimated model is used to illustrate the effects of two different policy changes

the danish green certificate system some simple analytical results we formulate a simple static equilibrium model for the electricity market taking account of both green certificates and co2 emission permits the objective is to investigate the relationship between these markets under the existence of upper and lower price bounds on the green certificates both in the short and in the long run we perform various comparative static changes of the parameters of the model and study how these affect the endogenous variables of the model as well as producers and consumers surplus we also investigate the effects of imports and exports of electricity several comparative static results are derived and in particular it is shown that harsher co2 emission constraints and increased import wholesale price both may lead to reduced capacity of green electricity

put call parity theory and an empirical test of the efficiency of the london traded options market abstract put call parity theory in the presence of dividends is extended to take account of transaction costs and new testable models are derived these models are used to test the efficiency of the london traded options market using synchronous option and share prices when account is taken only of option spread significant numbers of deviations from put call parity are identified when commission costs on options and shares are considered however almost none of these deviations prove to be exploitable

nonlinear dynamics and stock returns simple deterministic systems are capable of generating chaotic output that mimics the output of stochastic systems for this reason algorithms have been developed to distinguish between these two alternatives these algorithms and related statistical tests are also useful in detecting the presence of nonlinear dependence in time series in this article the authors apply these procedures to stock returns and find evidence that indicates the presence of nonlinear dependence on weekly returns from the center for research in security prices value weighted index copyright 1989 by the university of chicago

testing the martingale hypothesis in deutsche mark futures with models specifying the form of heteroscedasticity summary we examine the form of heteroscedasticity in deutsche mark futures price data and compare different specifications of the particular way that the variance is changing over time the martingale hypothesis is tested with daily and weekly rates of change of futures prices for the deutsche mark and some evidence is found against this hypothesis in analyses of daily data from 1981 to 1985 this rejection of the martingale hypothesis may be attributed to trading day effects in foreign currency prices and the resulting day of the week patterns in futures prices when the martingale hypothesis is tested with weekly data the null hypothesis is retained

a conditional variance model for daily deviations of an exchange rate a model for the distribution of daily deviations of an exchange rate is suggested the distribution is gaussian with a variance that depends on previous deviations the model is applied to the exchange rate of the u s dollar to special drawing rights

arch models properties estimation and testing abstract the aim of this survey paper is to provide an account of some of the important developments in the autoregressive conditional heteroskedasticity arch model since its inception in a seminal paper by engle 1982 this model takes account of many observed properties of asset prices and therefore various interpretations can be attributed to it we start with the basic arch models and discuss their different interpretations arch models have been generalized in different directions to accommodate more and more features of the real world we provide a comprehensive treatment of many of the extensions of the original arch model next we discuss estimation and testing for arch models and note that these models lead to some interesting and unique problems there have been numerous applications and we mention some of these as we present different models the paper includes a glossary of the acronyms for the models we describe

rational expectations econometric analysis of changes in regime an investigation of the term structure of interest rates abstract this paper is of interest both for its methodological contribution of new tools for analyzing rational expectations models and for its substantive conclusions concerning the term structure of interest rates during the monetary experiment of october 1979 the paper studies systems subject to changes in regime interpreted here as occasional discrete shifts in the parameters governing the time series behavior of exogenous economic variables the specification is shown to be quite tractable both theoretically and empirically the technique is used to analyze yields on three month treasury bills and ten year treasury bonds during 1962 to 1987 a constant parameter linear model for short term rates is shown to be inconsistent both with the univariate time series properties of short rates and with the observed bivariate relation between long and short rates under the expectations hypothesis of the term structure an alternative nonlinear model that admits the possibility of changes in regime affords a much better description of the univariate process for short rates moreover the cross equation restrictions implied by the expectations hypothesis of the term structure are consistent with the nonlinear specification indeed the residuals of the restricted relation have a standard error of only 0 8 basis points this is a third less than that of a completely unrestricted linear regression of long rates on short rates and compares with an unconditional standard deviation of long rates of 142 basis points i conclude that once the recognition by bond traders of changes in regime is taken into account the expectations hypothesis of the term structure of interest rates holds up fairly well for these data

investments into forest biorefineries under different price and policy structures abstract increasing scarcity of oil reserves and the high co2 emissions from using oil have contributed to the development of renewable biofuels pulp and paper mill integrated forest biorefineries offer one important means to increase biofuel production this study analyzes the effects of policies to support biofuel production in the pulp and paper sector we study the relative effectiveness of three biofuel supporting policy instruments namely production subsidy input subsidy and investment subsidy we present a partial equilibrium pulp and paper market model with a biorefinery investment option a numerical model is used to evaluate the impacts of policy instruments on wood prices as well as input choices and investment strategies of pulp and paper industries the data represent the finnish pulp and paper sector we evaluate the values and direct costs of the policy instruments in a situation of exogenous biofuel production targets the direct costs of input and investment subsidies are higher than those of a production subsidy with all the policy instruments finnish pulp and paper mills would invest in wood gasifying technology instead of black liquor based one the number of biorefinery units is dependent on the subsidy type investment and input subsidies are likely to result in more numerous but smaller biofuel production units than a production subsidy with all the policy instruments the demand for wood increases in finland leading to higher wood prices this in turn could reflect negatively on the profitability of the pulp and paper industries to a significant degree the model and the results can be generalized to other countries and markets where integrated pulp and paper mills are operating

the day of the week effects on the volatility the role of the asymmetry in this paper we propose to evaluate whether asymmetry influences the day of the week effects on volatility we also investigate empirically the impact of the day of the week effect in major international stock markets using garch family models from a forecast framework indeed the existence of calendar effects might be interesting only if their incorporation in a model results in better volatility forecasts

heat or power how to increase the use of energy wood at the lowest cost abstract we compute the optimal subsidy level for fuelwood consumption that makes it possible to achieve the french biomass energy consumption target for this purpose we model the competition and trade offs between the consumption of fuelwood for heat fw h and the consumption of fuelwood for electricity fw e to do so we couple a forest sector model with an electricity simulation model and we test different scenarios combining fw h and fw e that account for contrasting potential increases in the carbon price and the potential reduction in the number of nuclear plants we assess the implications of these scenarios on 1 the budgetary costs for the government 2 industrial wood producers profits 3 cost savings in the power sector for the different scenarios tested and 4 the carbon balance we show that the scenario with the highest carbon price and the lowest number of nuclear plants is the least expensive from a budgetary perspective indeed when associated with a high carbon price co firing may increase fw e demand with a lower subsidy level which makes it possible to reduce the cost of reaching the target however in this case fw e crowds out part of fw h which may cause political and economic issues from a carbon balance perspective an fw h only scenario performs better than any other scenario that combines fw h and fw e due to the relatively low emissions factors of alternative technologies for electricity generation and in particular nuclear energy

an empirical analysis of alternative parametric arch models this paper presents empirical evidence on the effectiveness of eight different parametric arch models in describing daily stock returns twenty seven years of uk daily data on a broad based value weighted stock index are investigated for the period 1971 97 several interesting results are documented overall the results strongly demonstrate the utility of parametric arch models in describing time varying volatility in this market the parameters proxying for asymmetry in models that recognize the asymmetric behaviour of volatility are highly significant in each and every case however the performance of the various parameterizations is often fairly similar with the exception of the multiplicative garch model that performs qualitatively differently on several dimensions of performance the outperformance of any model s is not consistent across different sub periods of the sample suggesting that the optimal choice of a model is period specific the outperformance is also not consistent as we change from in sample inferences to out of sample inferences within the same period copyright 2000 john wiley sons ltd

a multi country study of power arch models and national stock market returns abstract ding et al 1993 ding z granger c w j engle r f 1993 a long memory property of stock market returns and a new model journal of empirical finance 1 83 106 suggested a model which extends the arch family of models for analyzing a wider class of power transformations than simply taking the absolute value or squaring the data as in the conventional conditional heteroscedastic models this paper analyzes the applicability of these power arch parch models to national stock market returns for 10 countries plus a world index we find the parch model to be generally applicable once garch and leverage effects are taken into consideration in addition we also find that the optimal power transformation is remarkably similar across countries

the cofiring problem of a power plant under policy regulations cofiring of fossil and renewable fuels can contribute to reaching tightening climate and renewable energy goals the increase in biomass share in cofiring decreases the use of fossil fuel and increases renewable energy production we study how energy and climate policies promote that increase first we present and solve an electricity producer s profit maximization problem with detailed technical description of cofiring we then study the effectiveness of policy instruments e g feed in laws and emission trading on biomass utilization in cofiring the study offers a novel approach to explore the cofiring problem because of the endogenous fuel choice combined with the policy analysis we study two different power plants that are located in two different european electricity market areas our analysis shows that both feed in tariff and feed in premium can have unexpected weaknesses when they are introduced together with emission trading therefore decision makers should be well informed and cautious when introducing these policies

a note on the no premature exercise condition of dividend payout unprotected american call options a clarification abstract it is shown that merlon s sufficient condition for no rational premature exercise of a dividend payout unprotected american call option is frequently misunderstood and used incorrectly in the finance literature when applied to the multiple dividend case this is especially true in papers we receive to review for journals the purpose of this note is to clarify understanding of the no premature exercise condition

conditional variance and the risk premium in the foreign exchange market abstract we investigate the existence of a risk premium in the foreign exchange market based on the conditional variance of market forecast errors the forecast errors are assumed to follow the arch process introduced by engle 1982 estimation and diagnostic testing of the model are discussed and results are presented for the currencies of the united kingdom france germany japan and switzerland