the capital cost of holding inventory with stochastically mean reverting purchase price most models of inventory control assume that the per unit purchase price is constant the capital cost of holding inventory can then be taken into account by adding a fixed interest rate r times the purchase price c to the out of pocket holding cost however it is not uncommon that the purchase price varies over time how the capital cost then should be calculated is the focus of the present paper the paper studies the common single item inventory model with a fixed set up cost and assumes that the stochastic purchase price follows the mean reverting ornstein uhlenbeck process methods for computing an adjusted interest rate r are suggested along with modifications of well known heuristics and formulas for lot sizing simulation tests where the optimal policy has been compared to policies obtained using modified versions of the silver meal method the part period algorithm and the eoq formula suggest that r should be estimated as the sum of the unadjusted interest rate and the average expected purchase price decrease measured over a period between 1 3 and 2 3 of the length of the order cycle

an r d race with knowledge accumulation i develop a model of an r d race with knowledge accumulation my model does not inherit the memorylessness property of the exponential distribution that troubles existing models of r d races hence firms knowledge stocks are no longer irrelevant to their behavior during the r d race and knowledge accumulation has strategic implications in this more general setting i obtain results that stand in marked contrast to the previous literature in particular under some conditions the firm that is behind in the race engages in catch up behavior this pattern of strategic interactions action reaction is consistent with empirical research copyright 2003 by the rand corporation

technological innovation and real investment booms and busts abstract we investigate why new high risk technologies can attract excessive and often unprofitable investment we develop an equilibrium model in which rational risk averse agents overinvest in a risky technology possibly to the point that its expected return is negative overinvestment results from relative wealth concerns which arise endogenously from the imperfect tradability of future endowments competition over future consumption leads to an indirect utility for wealth with keeping up with the joneses properties that can induce herding because overinvestment increases with the risk of the technology our model can explain why new risky technological innovations may promote investment bubbles

leveraged investments and agency conflicts when cash flows are mean reverting we analyse the effect of mean reverting cash flows on the costs of shareholder bondholder conflicts arising from partially debt financed investments in a partial equilibrium setting we find that such agency costs are significantly lower under mean reverting mr dynamics when compared to the ubiquitous geometric brownian motion gbm the difference is attributed to the stationarity of the mr process in addition through the application of a novel agency cost decomposition we show that for a larger speed of mean reversion agency costs are driven mainly by suboptimal timing decisions as opposed to suboptimal financing decisions in contrast under the standard gbm assumption the agency costs are driven mainly by suboptimal financing decisions for large growth rates and by suboptimal timing decisions for smaller or negative growth rates

evaluating the economy embedded in the brazilian ethanol gasoline flex fuel car a real options approach the introduction of the flex fuel cars in the brazilian market in 2003 changed considerably the consumer decision making process prior to this date it was necessary to choose the automobile type only by gasoline or by ethanol fuel today it is possible to choose a car type with both fuel options this flexibility generates economic advantages for his owner but what are the financial benefits of a flex fuel car in comparison with a car using only gasoline geographically where is the owner of the benefits from this flexibility located this article presents an empirical application of the real options theory in the analysis of the flex fuel car option for five geographic brazilian regions northern northeastern central western southeastern and southern the regional price differences as well as the consumer preferences of these regions were met for this purpose historical fuel prices were considered stochastic and following a mean reverting stochastic process the prediction and option values were

an equilibrium analysis of hedging with liquidity constraints speculation and government price subsidy in a commodity market we develop a simple commodity model to analyze i the effects of hedgying with liquidity constraints due to producers inability to bear unlimited trading losses ii the role of speculation in the process of risk allocation between consumers and producers and iii the equilibrium implications of government price subsidies to the producers we find that 1 liquidity constraints can cause futures prices to exhibit mean reversion which then makes speculation profitable 2 speculation tends to make futures price volatility an increasing function of futures price and 3 government price subsidy if actively hedged by the producers serves to lower the futures risk premium and reduce futures volatility commodity spot and futures prices are determined by the following types of market participants producers consumers speculators and governments producers have generally taken short futures positions in order to hedge against price declines consumers have generally taken long futures positions in order to hedge against price increases speculators who neither produce nor intend to consume the commodity are present in the spot and futures markets for the purpose of making a profit governments play significant roles in the markets by providing producers with various support programs and in some cases by directly intervening in the markets to affect commodity prices or adjust inventory levels the traditional approach to commodity futures pricing has been based on the theory of storage 1 as fama and french 1987 1988 show this approach to commodity pricing is particularly useful for explaining the basis movement as a function of inventory levels based on the hypothesis that the marginal convenience yield on inventory declines at a decreasing rate as

detecting spot price forecasts in futures prices futures markets are often described as having two important social functions first they facilitate the transfer of commodity price risk and second they provide forecasts of commodity prices the evidence that futures markets transfer price risk is irrefutable however there is some debate about the markets forecasting ability in particular forecasts based on the current spot price are often as good as those based on the futures price some economists cite a failure to detect superior forecast power in futures prices as evidence of market inefficiency see e g leuthold 1974 and martin and garcia 1981 there are at least two other explanations first there may be nothing for the futures market to forecast if the current spot price equals the true expectation of the future spot price the futures market cannot provide a better forecast second a superior futures market forecast may be obscured by the unexpected component of the realized spot price the true expectation of the future spot price is unobservable one must approximate this expectation with the actual future spot price

valuing managerial flexibility an application of real option theory to mining investments abstract the value of managerial flexibility is assessed using data on prices costs grades reserves ore extraction and metal output for a panel of canadian copper mines a real option model is estimated and solved for project and option values most empirical researchers i consider the initial investment decision but neglect flexible operation thereafter ii assume that price is stochastic but ignore cost and reserve uncertainty and iii model price as a nonstationary stochastic process the evolution of three state variables price cost and reserves is assessed here differences in assumptions compared to others are found to lead to large differences in estimated project and option values

soybean inventory and forward curve dynamics we present two results concerning soybean prices first we exhibit a simple relationship between stocks and price volatility the observation of an increasing price volatility with decreasing inventory is often mentioned in the literature but has so far been documented using a proxy for inventory see fama and french 1987 1988 litzenberger and rabinowitz 1995 instead we reconstruct a yearly quarterly and monthly database of worldwide soybean inventories using aggregate data from the united states brazil and argentina we show that under all time scales price volatility is an increasing linear function of inverse inventory which we term scarcity second we show how the addition of the factor scarcity in a state variable approach to the dynamics of the term structure of soybean forward prices improves the quality of the fit we document this property on a 25 year database of cbot futures contracts and show that the superior accuracy also affects long maturity futures contracts an important property for the valuation of long term origination contracts between producing countries and the agrifood industry

can government spending increase private consumption the role of complementarity abstract it is empirically observed that private consumption responds positively to fiscal shocks we offer an explanation for this stylized fact based on the idea of complementarity between public and private consumption

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

can fiscal spending stimulate private consumption abstract empirically government expenditure shocks seem to crowd in private consumption while neoclassical and new keynesian models predict crowding out we derive conditions under which a government in utility specification in a sticky price model helps to reconcile theory and evidence

commodity betas with mean reverting output prices abstract this paper provides a theoretical derivation of commodity beta stock price sensitivity to commodity price using a contingent claim model the model incorporates operating leverage financial leverage costly financial distress and mean reverting commodity prices and highlights the important role played by the speed of reversion of the commodity price it is used to identify theoretically the main determinants of commodity beta commodity beta is predicted to be an increasing function of the operating and financial leverage of the firm and a decreasing function of the company s tax rate and the level volatility and speed of reversion of the commodity price empirical tests with a sample of gold mining firms provide support for these predictions particularly the new implications of the model the effect of the commodity price s speed of reversion and the company s tax rate

commodity trade and the carry trade a tale of two countries persistent interest rate differentials account for much of the currency carry trade profitability commodity currencies offer high interest rates on average while countries that export finished goods tend to have low interest rates we develop a general equilibrium model of international trade and currency pricing where countries have an advantage in producing either basic inputs or final goods in the model domestic production insulates commodity producing countries from global productivity shocks forcing final good producers to absorb them commodity currency exchange rates and risk premia increase with productivity differentials and trade frictions these predictions are strongly supported in the data this article is protected by copyright all rights reserved

the effect of government spending on private consumption a puzzle the empirical finding that cyclical changes in government spending tend to be associated with positive responses of private consumption has been interpreted as a challenge for representative agent intertemporal optimizing theories which usually imply that the negative wealth effect of higher fiscal spending reduces the households consumption and leisure the present paper shows that the evidence can be explained by a standard real business cycle type model with a nonadditively separable utility function and a small intertemporal consumption elasticity higher fiscal spending can raise consumption and lower investment as in the data the nonseparable utility model is shown to imply the same consumption euler equation as a model with rule of thumb consumers who mechanically spend their income

why does private consumption rise after a government spending shock recent empirical evidence suggests that private consumption is crowded in by government spending this outcome violates existing macroeconomic theory according to which the negative wealth effect brought about by a rise in public expenditure should decrease consumption

fiscal stimulus and the role of wage rigidity abstract in this paper we study the impact of an expansion in public spending in an economy characterized by limited asset market participation and sticky wages the flexible wage version of the model implies strong expansionary effects on output and consumption but also a counterfactual increase in real wages the introduction of sticky wages besides being a realistic addition solves this problem and preserves the expansionary effects on output and consumption moreover once we introduce segmentation in the labor market sticky wages are even essential to obtain expansionary effects

free entry and social inefficiency our goal is to provide a simple yet general exposition of the conditions under which the number of entrants in a free entry equilibrium is excessive insufficient or optimal our analysis compares the number of firms that enter a market when there is free entry with the number that would be desired by a social planner who is unable to control the behavior of firms once they are in the market that is we consider the second best problem of choosing the welfare maximizing number of firms while we take as given their noncompetitive behavior after entry we demonstrate that the crucial conditions for establishing the presence of an entry bias can be stated quite simply in terms of the outcome of the postentry game played by entrants in contrast to previous work we do not need to model this postentry game explicitly

optimal inventory policies when purchase price and demand are stochastic in this paper we consider the problem of a firm that faces a stochastic poisson demand and must replenish from a market in which prices fluctuate such as a commodity market we describe the price evolution as a continuous stochastic process and we focus on commonly used processes suggested by the financial literature such as the geometric brownian motion and the ornstein uhlenbeck process it is well known that under variable purchase price a price dependent base stock policy is optimal using the single unit decomposition approach we explicitly characterize the optimal base stock level using a series of threshold prices we show that the base stock level is first increasing and then decreasing in the current purchase price we provide a procedure for calculating the thresholds which yields closed form solutions when price follows a geometric brownian motion and implicit solutions under the ornstein uhlenbeck price model in addition our numerical study shows that the optimal policy performs much better than inventory policies that ignore future price evolution because it tends to place larger orders when prices are expected to increase

option pricing with mean reversion and stochastic volatility many underlying assets of option contracts such as currencies commodities energy temperature and even some stocks exhibit both mean reversion and stochastic volatility this paper investigates the valuation of options when the underlying asset follows a mean reverting lognormal process with stochastic volatility a closed form solution is derived for european options by means of fourier transform the proposed model allows the option pricing formula to capture both the term structure of futures prices and the market implied volatility smile within a unified framework a bivariate trinomial lattice approach is introduced to value path dependent options with the proposed model numerical examples using european options american options and barrier options demonstrate the use of the model and the quality of the numerical scheme

nonseparable preferences fiscal policy puzzles and inferior goods nonseparable preferences over consumption and leisure can generate an increase in private consumption in response to government spending as found in the data in a frictionless business cycle model however the conditions on preferences required for these result to obtain hold if and only if the consumption good is inferior similarly positive co movement of consumption and hours worked occurs if and only if either consumption or leisure is inferior

know how and asset complementarity and dynamic capability accumulation the case of r d dynamic capabilities enable firms to create new products and processes and respond to changing market conditions this empirical investigation of dynamic r d capabilities deals with the role of complementary know how and other assets in the context of changing conditions in the u s petroleum industry during the 1970s and early 1980s the analysis suggests that in response to rising oil prices firms with larger amounts of complementary technological knowledge and physical assets also undertook larger amounts of r d on coal conversion a synthetic fuels process 1997 by john wiley sons ltd

rule of thumb consumers meet sticky wages it has been argued that rule of thumb consumers substantially alter the determinacy properties of simple interest rate rules and the dynamics of an otherwise standard new keynesian model in this paper we show that nominal wage stickiness helps re establishing standard results key findings are that wage stickiness i affects the shape of determinacy regions in the parameters space restoring the relevance of the taylor principle for the conduct of monetary policy ii implies that a rise in consumption in response to an innovation in government spending is not a robust feature of the model

the general equilibrium effects of fiscal policy estimates for the euro area abstract this paper describes a dynamic stochastic general equilibrium model featuring a fraction of non ricardian agents in order to estimate the effects of fiscal policy in the euro area the model takes into account distortionary taxation on labor and capital income and on consumption while expenditures are broken down into purchases of goods and services compensation of public employees and transfers to households a newly computed quarterly data set of fiscal variables is used our results point to the prevalence of mild keynesian effects of public expenditures in particular although innovations in fiscal policy variables tend to be rather persistent government purchases of goods and services and compensations for public employees have small and short lived expansionary effects on private consumption while innovations in transfers to households show a slightly more sizeable and lasting effect the effects are more significant on the revenue side decreases in labor income and consumption tax rates have sizeable effects on consumption and output while a reduction in capital income tax favors investment and output in the medium run finally our estimates suggest that fiscal policy variables contribute little to the cyclical variability of the main macro variables

using stock returns to identify government spending shocks this article explores a new approach to identifying government spending shocks which avoids many of the shortcomings of existing approaches the new approach is to identify government spending shocks with statistical innovations to the accumulated excess returns of large us military contractors this strategy is used to estimate the dynamic responses of output hours consumption and real wages to a government spending shock we find that positive government spending shocks are associated with increases in output hours and consumption real wages initially decline after a government spending shock and then rise after a year we estimate the government spending multiplier associated with increases in military spending to be about 1 5 over a horizon of 5 years

optimal storage by crop producers when post harvest marketing strategies are restricted by disallowing speculative purchases sales out of storage becomes an irreversible decision and the dynamic marketing problem becomes analogous to the optimal exercise of a financial option the optimal marketing strategy is to hold at low prices and to sell at high prices with a cutoff price function marking the boundary between low and high prices a method for estimating the cut off price function is developed and applied to illinois soybean prices the decision rule is demonstrated to result in substantial gains from storage copyright 2002 oxford university press

valuation of commodity futures and options under stochastic convenience yields interest rates and jump diffusions in the spot this paper investigates the effects of stochastic convenience yields stochastic interest rates and jumps in the spot price on the pricing of commodity futures forwards and futures options numerical examples show that one factor prices differ materially from the stochastic convenience yield two factor prices when convenience yield is considerably above its long term average the extension to a three factor model with stochastic interest rates leads to a different futures price but the forward price is unchanged the extension ofthe three factor model to include jumps in the spot price process does not affect forward or futures prices but it can have an impact on options prices the model is applied to price the present value of future cash flows from a real asset

wages and productivity growth in a competitive industry abstract we describe the evolution of productivity growth in a competitive industry with free entry and exit the exogenous wage rate determines the firms engagement in labor productivity enhancing process innovation there is a unique steady state of the industry dynamics which is globally asymptotically stable in the steady state the number of active firms their unit labor cost and supply depend on the growth rate but not on the level of the wage rate in addition to providing comparative statics of the steady state the paper characterizes the industry s adjustment path

commodity prices and unit root tests price theory suggests that commodity prices should be stationary series yet tests for unit roots rather frequently imply that these prices are not stationary this seeming inconsistency is investigated by applying alternative specifications of unit root tests to prices of corn soybeans barrows and gilts and milk the preponderance of evidence suggests that nominal prices do not have unit roots but the results are sensitive to the specification of the test equation accounting for a structural change that shifts the mean appears to be an important issue in unit root tests

on fiscal multipliers estimates from a medium scale dsge model this paper contributes to the debate on fiscal multipliers in the context of a structural model i estimate a micro founded dynamic stochastic general equilibrium model that features a rich fiscal policy block and a transmission mechanism for government spending shocks using bayesian techniques for us data

deep habits and exchange rate pass through abstract habit persistence at the level of individual goods varieties can explain incomplete exchange rate pass through to international prices deep habits give rise to a dynamic import demand function that leads to import price markup adjustments independently of nominal pricing frictions augmenting a two country dsge model with deep habits we obtain low exchange rate pass through to import prices even when nominal local currency price rigidities are negligibly low as nominal pricing frictions become more important the presence of deep habits further impedes the pass through of exchange rate fluctuations estimating model variants with limited information as well as full information methods we find that the deep habits model requires much lower degrees of nominal price rigidities to match empirical measures of the pass through of exchange rate fluctuations to us import prices

the samuelson hypothesis in futures markets an analysis using intraday data this paper considers the samuelson hypothesis which argues that the futures price volatility increases as the futures contract approaches its expiration utilizing intraday data from 20 futures markets in six futures exchanges we find strong support for the samuelson hypothesis in agricultural futures however the samuelson hypothesis does not hold for other futures contracts we also provide supporting evidence that the negative covariance hypothesis is the key factor for the empirical support of the samuelson hypothesis in addition our findings remain largely unaltered even after we control for seasonality and liquidity effects

measuring prior sensitivity and prior informativeness in large bayesian models abstract in large bayesian models such as modern dsge models it is difficult to assess how much the prior affects the results this paper derives measures of prior sensitivity and prior informativeness that account for the high dimensional interaction between prior and likelihood information the basis for both measures is the derivative matrix of the posterior mean with respect to the prior mean which is easily obtained from markov chain monte carlo output we illustrate the approach by examining posterior results in the small model of lubik and schorfheide 2004 and the large model of smets and wouters 2007

speculative profits innovation and growth when technological change affects the prices of tradeable assets innovators can obtain speculative profits by exploiting their inside information as to the occurrence of innovations we propose a tractable model of endogenous growth that formalizes this argument originally due to hirshleifer 1971 we then use the model to assess two claims advanced by hirshleifer namely that speculative profits can generate excessive investment in r d when they add to monopoly rents guaranteed by patent protection or else even in a perfectly competitive economy the analysis confirms the first claim but casts doubts on the second one jel o30 o40

the cyclical behavior of marginal cost and price the author examines the cyclical behavior of price marginal cost margins for u s manufac turing after 1956 short run marginal cost is markedly procyclical this is primarily due to procyclical overtime payments incurred beca use employment is not perfectly flexible in most industries output price fails to respond to the cyclical movement in marginal cost so price marginal cost margins are markedly countercyclical the res ults contradict business cycle theories that explain low production i n a recession by a high real cost of producing they support theories that explain low production in a recession by the inability of firms to sell their output copyright 1987 by american economic association

when does government debt crowd out investment summary we examine when government debt crowds out investment for the us economy using an estimated new keynesian model with detailed fiscal specifications and accounting for monetary and fiscal policy interactions whether investment is crowded in or out in the short term depends on policy shocks triggering debt expansions higher debt can crowd in investment for cutting capital tax rates or increasing government investment contrary to the conventional view no systematic relationships between real interest rates and investment exist explaining why reduced form regressions are inconclusive about crowding out at longer horizons distortionary financing is important for the negative investment response to debt copyright 2013 john wiley sons ltd

no arbitrage conditions for storable commodities and the modeling of futures term structures abstract one distinguishable feature of storable commodities is that they relate to two markets cash market and storage market this paper proves that if no arbitrage exists in the storage cash dual markets the commodity convenience yield has to be non negative however classical reduced form models for futures term structures could allow serious arbitrages due to the high volatility of the convenience yield to avoid negative convenience yield this paper proposes a semi affine arbitrage free model which prices futures analytically and fits futures term structures reasonably well importantly our model prices commodity related contingent claims such as calendar spread options quite differently with classical models

what are the effects of fiscal policy shocks we propose and apply a new approach for analyzing the effects of fiscal policy using vector autoregressions specifically we use sign restrictions to identify a government revenue shock as well as a government spending shock while controlling for a generic business cycle shock and a monetary policy shock we explicitly allow for the possibility of announcement effects i e that a current fiscal policy shock changes fiscal policy variables in the future but not at present we construct the impulse responses to three linear combinations of these fiscal shocks corresponding to the three scenarios of deficit spending deficit financed tax cuts and a balanced budget spending expansion we apply the method to us quarterly data from 1955 to 2000 we find that deficit financed tax cuts work best among these three scenarios to improve gdp with a maximal present value multiplier of five dollars of total additional gdp per each dollar of the total cut in government revenue 5 years after the shock copyright 2009 john wiley sons ltd

unspanned stochastic volatility and the pricing of commodity derivatives commodity derivatives are becoming an increasingly important part of the global derivatives market here we develop a tractable stochastic volatility model for pricing commodity derivatives the model features unspanned stochastic volatility quasi analytical prices of options on futures contracts and dynamics of the futures curve in terms of a low dimensional affine state vector we estimate the model on nymex crude oil derivatives using an extensive panel data set of 45 517 futures prices and 233 104 option prices spanning 4082 business days we find strong evidence for two predominantly unspanned volatility factors jel g13

pricing of options on commodity futures with stochastic term structures of convenience yields and interest rates we develop a model to value options on commodity futures in the presence of stochastic interest rates as well as stochastic convenience yields in the development of the model we distinguish between forward and future convenience yields a distinction that has not been recognized in the literature assuming normality of continuously compounded forward interest rates and convenience yields and log normality of the spot price of the underlying commodity we obtain closed form solutions generalizing the black scholes merton s formulas we provide numerical examples with realistic parameter values showing that both the effect of introducing stochastic convenience yields into the model and the effect of having a short time lag between the maturity of a european call option and the underlying futures contract have significant impact on the option prices

price mean reversion seasonality and options markets options on agricultural commodities with maturities exceeding one year seldom trade one possible reason to explain this lack of trading is that we do not have an accurate option pricing model for products where mean reversion in spot price levels can be expected standard option pricing models assume proportionality between price variance and time to maturity this proportionality is not a valid assumption for commodities whose supply response brings prices back to production costs the model proposed here incorporates mean reversion in spot price levels and includes a correction for seasonality mean reversion and seasonality are both observed in the soybean market the empirical analysis lends strong support to the model

a real options based model and its application to china s overseas oil investment decisions abstract this paper applies real options theory to overseas oil investment by adding an investment environment factor to oil resource valuation a real options model is developed to illustrate how an investor country or oil company can evaluate and compare the critical value of oil resource investment in different countries under oil price exchange rate and investment environment uncertainties the aim is to establish a broad model that can be used by every oil investor country to value overseas oil resources the model developed here can match three key elements 1 deal with overseas investment the effects of investment environment and exchange rates 2 deal with oil investment oil price production decline rate and development cost etc 3 the comparability of the results from different countries different countries oil investment situation can be compared by using the option value index ovi china s overseas oil investment is taken as an example to explain the model by calculating each oil investee country s critical value per unit of oil reserves and examining the effect of different factors on the critical value the results show that the model developed here can provide useful advice for china s overseas oil investment program the research would probably also be helpful to other investor countries looking to invest in overseas oil resources

fiscal policy in the new neoclassical synthesis we analytically derive the cyclical effects of fiscal policy shocks in a new neoclassical synthesis model price stickiness has the consequence that a rise in government demand affects labor demand while at the same time the usual wealth effect boosts labor supply the strength of the demand effect depends on the response of the real interest rate governed by the monetary policy regime when the central bank controls money growth fiscal expansions are deflationary and might even be contractionary whereas output wages and inflation can increase when the rise in the real interest rate is dampened by an interest rate rule however price stickiness alone is not sufficient to explain a rise in consumption as predicted by keynesian theory

cointegration and detectable linear and nonlinear causality analysis using the london metal exchange lead contract this study applies linear and nonlinear granger causality tests to examine the dynamic relation between london metal exchange lme cash prices and three possible predictors the analysis uses matched quarterly inventory uk treasury bill interest rates futures prices and cash prices for the commodity lead traded on the lme the effects of cointegration on both linear and nonlinear granger causality tests is also examined when cointegration is not modelled evidence is found of both linear and nonlinear causality between cash prices and analysed predictor variables however after controlling for cointegration evidence of significant nonlinear causality is no longer found these results contribute to the empirical literature on commodity price forecasting by highlighting the relationship between cointegration and detectable linear and nonlinear causality the importance of interest rate and inventory as well as futures price in forecasting cash prices is also illustrated failure to detect significant

fiscal policy in general equilibrium this paper studies four classic fiscal policy experiments within a quantitatively restricted neoclassical model the authors main findings are as follows 1 permanent changes in government purchases can lead to short run and long run output multipliers that exceed one 2 permanent changes in government purchases induce larger effects than temporary changes 3 the financing decision is quantitatively more important than the resource cost of changes in government purchases and 4 public investment has dramatic effects on private output and investment these findings stem from important dynamic interactions of capital and labor absent in earlier equilibrium analyses of fiscal policy copyright 1993 by american economic association

commodity derivatives pricing with cointegration and stochastic covariances abstract empirically cointegration and stochastic covariances including stochastic volatilities are statistically significant for commodity prices and energy products to capture such market phenomena we develop a continuous time dynamics of cointegrated assets with a stochastic covariance matrix and derive the joint characteristic function of asset returns in closed form the proposed model offers an endogenous explanation for the stochastic mean reverting convenience yield the time series of spot and futures prices of wti crude oil and gasoline shows cointegration relationship under both physical and risk neutral measures the proposed model also allows us to fit the observed term structure of futures prices and calibrate the market implied cointegration relationship we apply it to value options on a single commodity and on multiple commodities

mean reversion in equilibrium asset prices evidence from the futures term structure we use the term structure of futures prices to test whether investors anticipate mean reversion in spot asset prices the empirical results indicate mean reversion in each market we examine for agricultural commodities and crude oil the magnitude of the estimated mean reversion is large for example point estimates indicate that 44 percent of a typical spot oil price shock is expected to be reversed over the subsequent eight months for metals the degree of mean reversion is substantially less but still statistically significant we detect only weak evidence of mean reversion in financial asset prices in this study we provide evidence of mean reversion in the prices of several real and financial assets rather than examining evidence of ex post reversion using time series of asset prices we use price data from futures contracts with varying delivery horizons to test whether investors expect asset prices to revert this approach offers two advantages first since futures prices are readily available for many markets our procedure can be implemented for many assets including those for which reliable spot price data is elusive second there is little ambiguity as to the source of any mean reversion detected using our method subject only to the maintained assumption that the no arbitrage cost of carry condition holds our test detects mean reversion that is expected to occur in equilibrium but has no power to detect mean reversion resulting from noise or inefficiencies our methodology focuses on relations between price levels and the slope of the futures term structure defined as the change across delivery dates in the futures prices observed on a given trading date an inverse relation between prices and the futures term slope constitutes evidence that investors expect mean reversion in spot prices to illustrate initially assume there are no

propagation mechanisms for government spending shocks a bayesian comparison the inability of a simple real business cycle model to predict a rise in consumption in response to increased government expenditures observed in many empirical studies has stimulated the development of alternative theories of government spending shocks using the bayesian approach we evaluate the quantitative performance of five extant models and find that neither of the considered transmission mechanisms for government spending helps improve the fit of the baseline model moreover we find that consumption decreases in all estimated models in response to a rise in government spending

profit margin hedging some extension economists and others recommend profit margin hedging as a way to choose the timing of crop sales however the theory behind this strategy recommendation is not well developed this article determines the producer s utility function and price processes where profit margin hedging is optimal profit margin hedging is shown to be an optimal strategy under a highly restricted target utility function even in an efficient market profit margin hedging is profitable if prices are mean reverting copyright 2010 oxford university press

can real option values explain apparent storage at a loss since decisions to sell grain are irreversible waiting to sell grain can have a real option value this real option value may explain why producers appear to store too long a new seasonal mean reversion model is estimated that allows prices to be a random walk with drift within a season but mean reverting across crop years unless prices are extremely low selling before mean reversion begins is optimal thus the real option value of waiting does not explain why some producers seem to store at a loss in the latter part of crop years

can public spending boost private consumption this paper analyses the effects on private consumption from an increase in productive and unproductive public spending a new keynesian model incorporating price and wage rigidities monetary policy and various fiscal rules is developed and estimated using bayesian techniques to capture the key cyclical characteristics of the us economy we find that price and wage rigidities along with a positive shock to the part of public spending that is productive are suficient to boost private consumption moreover we show that this initial positive reaction of private consumption is adequate to create a positive present value consumption multiplier for more than five years finally we show that our main results remain robust to changes in the monetary rule and the various methods of deficit financing

volatility and price jumps in agricultural futures prices evidence from wheat options revised version published in american journal of agricultural economics vol 86 number 4 november 2004 1018 1031

local identification in dsge models abstract the issue of identification arises whenever structural models are estimated lack of identification means that the empirical implications of some model parameters are either undetectable or indistinguishable from the implications of other parameters therefore identifiability must be verified prior to estimation this paper provides a simple method for conducting local identification analysis in linearized dsge models estimated in both full and limited information settings in addition to establishing which parameters are locally identified and which are not researchers can determine whether the identification failures are due to data limitations such as lack of observations for some variables or whether they are intrinsic to the structure of the model the methodology is illustrated using a medium scale dsge model

priors from general equilibrium models for vars abstract this paper uses a simple new keynesian dynamic stochastic general equilibrium model as a prior for a vector autoregression shows that the resulting model is competitive with standard benchmarks in terms of forecasting and can be used for policy analysis jel classification c11 c32 c53 key words bayesian analysis dsge models forecasting vector autoregressions 1 introduction dynamic stochastic general equilibrium dsge models are popular nowadays in macroeconomics they are taught in virtually every economics ph d program and represent a predominant share of publications in the field yet when it comes to policy making these models are scarcely used at least from a quantitative point of view the main quantitative workhorse for policy making at the federal reserve system is frb us a macro econometric model built in the cowles foundation tradition a style of macroeconomics that is no longer taught in many ph d programs 1 in their decision process fed policy makers rely heavily on forecasting they want to know the expected path of inflation in the next few quarters and by how much a 50 basis point increase in the federal funds rate would affect that path frb us offers answers to these questions answers that many macroeconomists would regard with suspicion given both the lucas 1976 critique and the fact that in general the restrictions imposed by cowles foundation models are at odds with dynamic general equilibrium macroeconomics sims 1980 general equilibrium models on the other hand have a hard time providing alternative answers the fact that these models are perceived to do badly in terms of forecasting as they are scarcely parameterized is perhaps one of the reasons why they are not at the forefront of policy making while progress is being made in the development of dsge models that deliver acceptable forecasts e g smets and wouters 2003 this paper proposes an approach that combines a stylized general equilibrium model with a vector autoregression var to obtain a specification that both forecasts well and is usable for policy analysis specifically the approach involves using prior information coming from a dsge model in the estimation of a vector autoregression loosely speaking this prior can be thought of as the result of the following exercise i simulate time series data from the dsge model ii fit a var to these data in practice we replace the sample moments of the simulated data by population moments computed from the dsge model solution since the dsge model depends on unknown structural parameters we use a hierarchical prior in our analysis by placing a distribution on the dsge model parameters a tightness parameter controls the weight of the dsge model prior relative to the weight of the actual sample markov chain monte carlo methods are used to generate draws from the joint posterior distribution of the var and dsge model parameters the paper shows that the approach makes even a fairly stylized new keynesian dsge model competitive with standard benchmarks in terms of forecasting real output growth inflation and the nominal interest rate the three variables that are of most interest to policy makers 2 up to this point our procedure borrows from the work of dejong ingram and whiteman 1993 and ingram and whiteman 1994 who are the first to use priors from dsge models for vars ingram and whiteman showed that prior information from the bare bones stochastic growth model of king plosser and rebelo 1988 is helpful in forecasting real economic activity such as output consumption investment and hours worked in addition to documenting the forecasting performance of a trivariate var with a prior derived from a monetary dsge model this paper makes two contributions that significantly extend the earlier work first we show formally how posterior inference for the var parameters can be translated into posterior inference for dsge model parameters

a jump diffusion model for pricing and hedging with margined options an application to brent crude oil contracts abstract we develop a jump diffusion model for pricing and hedging with margined options on futures unlike a standard equity option margined options require no up front payment an attractive feature of margined options is that there is no early exercise premiums under general assumptions model parameter estimates and out of sample pricing errors are calculated using data on brent crude contracts using the same pricing technology we also hedge equity style options with margined options hedging coefficients are derived by matching an extended set of greeks we find that a target equity option can be effectively hedged using a portfolio of two margined options and the underlying as has been reported elsewhere a delta hedge is inappropriate when the underlying is a jump diffusion

the effects of public spending externalities abstract we conduct a positive analysis on the effects of externalities produced by government spending to this effect we estimate using u s data an rbc model with two salient features first we allow government consumption to directly affect the marginal utility of consumption second we allow public capital to shift the productivity of private factors we provide an identification analysis that supports the strategy adopted for estimating the parameters governing these two channels on one hand private and government consumption are robustly estimated to be substitute goods because of substitutability labor supply reacts little to a government consumption shock so the estimated output multiplier is much lower than in models with separabilities on the other hand our results point towards public investment being unproductive

what causes over investment in r d in endogenous growth models endogenous growth models may exhibit either under or over investment in r d the possibility of over investment is generally attributed to a business stealing effect that arises as the latest innovator destroys and or appropriates previous incumbent s rents we argue that this conventional wisdom is misleading in standard models business stealing by itself cannot result in excessive r d we explain the other effects that must be at work here thus contributing towards a better understanding of when and why the market may be biased towards excessive r d

the long term structure of commodity futures futures markets on agricultural commodities typically trade with maximum maturity dates of less than four years if these markets did trade with maturities eight or ten years distant futures prices would have value as price forecasts and as a way to structure long term swaps and insurance contracts agricultural commodity markets generally exhibit mean reversion in spot prices and convenience yields spot markets also exhibit seasonality this study develops and implements a procedure to generate long term futures curves from existing futures prices data on lean hogs and soybeans are used to show that the method provides plausible results copyright 2012 oxford university press

evaluating the risk premium in the u s a natural gas market evidence from low price regime abstractin recent years the u s a natural gas market has seen enormous changes the expectations of abundant supply of shale gas and the slow u s a economic recovery have pushed gas prices below us 4 mmbtu although shale gas is a new promising source of unconventional energy investors face uncertain investment plans in this study we investigate the risk premium by comparing behaviour before and after the change point in agents risk perception unlike traditional empirical research on risk premium we use the parametric two factor model of schwartz and smith 2000 to evaluate the implied risk premium term structure from futures prices traded on the new york mercantile exchange nymex we compare our findings with other empirical results and find that the change point lies at the beginning of the low price regime when we compare periods before and after the change point we observe that the risk premium changed not only in sign but also in magnitude

identification of maximal affine term structure models building on duffie and kan 1996 we propose a new representation of affine models in which the state vector comprises infinitesimal maturity yields and their quadratic covariations because these variables possess unambiguous economic interpretations they generate a representation that is globally identifiable further this representation has more identifiable parameters than the maximal model of dai and singleton 2000 we implement this new representation for select three factor models and find that model independent estimates for the state vector can be estimated directly from yield curve data which present advantages for the estimation and interpretation of multifactor models

analytical pricing of discretely monitored asian style options theory and application to commodity markets we compute an analytical expression for the moment generating function of the joint random vector consisting of a spot price and its discretely monitored average for a large class of square root price dynamics this result combined with the fourier transform pricing method proposed by carr and madan carr p madan d 1999 option valuation using the fast fourier transform journal of computational finance 2 4 summer 61 73 allows us to derive a closed form formula for the fair value of discretely monitored asian style options our analysis encompasses the case of commodity price dynamics displaying mean reversion and jointly fitting a quoted futures curve and the seasonal structure of spot price volatility four tests are conducted to assess the relative performance of the pricing procedure stemming from our formulae empirical results based on natural gas data from nymex and corn data from cbot show a remarkable improvement over the main alternative techniques developed for pricing asian style options within the market standard framework of geometric brownian motion

fiscal spending shocks endogenous government spending and real business cycles abstract we analyze a real business cycle model in which the government optimally chooses public investment and nonmilitary current expenditures to maximize the welfare of the representative private agent we characterize the optimal response of endogenous spending to shocks to technology and to military expenditures comovements between the components of government spending and other macroeconomic aggregates predicted by the model are compared with the corresponding comovements in the u s data the model captures the qualitative features of the relative volatilities of the components of government spending quite well but predicts too high correlations between the components of government spending and output

new keynesian versus old keynesian government spending multipliers renewed interest in fiscal policy has increased the use of quantitative models to evaluate policy because of modelling uncertainty it is essential that policy evaluations be robust to alternative assumptions we find that models currently being used in practice to evaluate fiscal policy stimulus proposals are not robust government spending multipliers in an alternative empirically estimated and widely cited new keynesian model are much smaller than in these old keynesian models the estimated stimulus is extremely small with gdp and employment effects only one sixth as large and with private sector employment impacts likely to be even smaller we investigate the sensitivity of our findings with regard to the response of monetary policy the zero bound on nominal interest rates and the inclusion of an empirically relevant degree of rule of thumb behaviour in the new keynesian model in addition we relate our findings using estimated structural macroeconomic models to the recent literature using reduced form regression techniques

information aggregation in a noisy rational expectations economy abstract this paper analyzes a general equilibrium model of a competitive security market in which traders possess independent pieces of information about the return of a risky asset each trader conditions his estimate of the return both on his own private source of information and price which in equilibrium serves as a noisy aggregator of the total information observed by all traders a closed form characterization of the rational expectations equilibrium is presented a counter example to the existence of fully revealing equilibrium is developed