arch and bilinearity as competing models for nonlinear dependence in this article we consider whether the wide acceptance of autoregressive conditional heteroscedasticity arch models may be at the expense of other nonlinear processes such as bilinear models we first propose a joint test for arch and bilinearity a nonnested test is then suggested to determine whether nonlinear dependence should be attributed to arch or bilinearity the tests are then applied to three series when generalized arch garch models are taken as the null hypothesis we fail to reject it for all the data series when bilinearity is taken as the null however it is rejected in two cases moreover an out of sample forecasting exercise shows that the garch model is superior the results therefore indicate a strong preference for the garch model

does the great recession imply the end of the great moderation international evidence in this paper we examine whether or not the great recession had a temporary or permanent effect on output growth volatility after years of low macroeconomic volatility since the early eighties based on break detection methods applied to a set of advanced countries our empirical results do not give evidence to the end of the great moderation period but rather that the great recession is characterized by a dramatic short lived effect on the output growth but not on its volatility we show that neglecting the breaks both in mean and in variance can have large effects on output volatility modeling based on garch specifications

historical financial analogies of the current crisis this paper tries to shed light on the historical analogies of the current crisis to that end we compare the current sample distribution of dow jones industrial average index returns for a 769 day period from 15 september 2008 the lehman brothers bankruptcy to 30 september 2011 with all historical sample distributions of returns computed using a moving window of 769 days in the 2 january 1900 to 12 september 2008 period using a kolmogorov smirnov and a 2 homogeneity tests which have the null hypothesis of equal distribution we find that the stock market returns distribution during the current crisis would be similar to several past periods of severe financial crises that evolved into intense recessions being the sub sample from 28 may 1935 to 17 jun 1938 the most analogous episode to the current situation furthermore when applying the procedure proposed by diebold gunther and tay 1998 for comparing densities of subsamples we obtain additional support for our findings and discover a period from 10 september 1930 to 13 october 1933 where the severity of the crisis overcome the current situation having sharper tail events finally when comparing historical market risk with the current risk we observe that the current market risk has only been exceeded in the beginning of the great depression

detecting multiple breaks in financial market volatility dynamics the paper evaluates the performance of several recently proposed tests for structural breaks in the conditional variance dynamics of asset returns the tests apply to the class of arch and sv type processes as well as data driven volatility estimators using high frequency data in addition to testing for the presence of breaks the statistics identify the number and location of multiple breaks we study the size and power of the new tests for detecting breaks in the conditional variance under various realistic univariate heteroscedastic models change point hypotheses and sampling schemes the paper concludes with an empirical analysis using data from the stock and fx markets for which we find multiple breaks associated with the asian and russian financial crises these events resulted in changes in the dynamics of volatility of asset returns in the samples prior and post the breaks copyright 2002 john wiley sons ltd

dynamic capacity management with substitution we examine a multiperiod capacity allocation model with upgrading there are multiple product types corresponding to multiple classes of demand and the firm purchases capacity of each product before the first period within each period after demand arrives products are allocated to customers customers who arrive to find that their product has been depleted can be upgraded by at most one level we show that the optimal allocation policy is a simple two step algorithm first use any available capacity to satisfy same class demand and then upgrade customers until capacity reaches a protection limit so that in the second step the higher level capacity is rationed we show that these results hold both when all capacity is salvaged at the end of the last demand period as well as when capacity can be replenished in the latter case an order up to policy is optimal for replenishment although finding the optimal protection limits is computationally intensive we describe bounds for the optimal protection limits that take little effort to compute and can be used to effectively solve large problems using these heuristics we examine numerically the relative value of strictly optimal capacity and dynamic rationing the value of perfect demand information and the impact of demand and economic parameters on the value of optimal substitution

outliers and garch models in financial data abstract we propose to extend the additive outlier ao identification procedure developed by franses and ghijsels franses p h ghijsels h 1999 additive outliers garch and forecasting volatility international journal of forecasting 15 1 9 to take into account the innovative outliers ios in a garch model we apply it to three daily stock market indexes and examine the effects of outliers on the diagnostics of normality

breaks and outliers when modelling the volatility of the u s stock market this study analyses volatility persistence of the u s stock market after taking into account the role of breaks and outliers by employing a wavelet based algorithm it identifies several outliers which are comfortably associated with major events such as the black monday and the asian crisis there is also evidence of clustering of breaks and a substantial variation in the properties of the identified segments

polluting non renewable resources and growth in an endogenous growth model with human capital accumulation we introduce non renewable resources which cause flow pollution problems in this set up the negative external effect of pollution on productivity does not cause any distortions in the economy the market economy will achieve the optimal extraction and growth rates consequently emission taxes are unnecessary and when introduced will have no effect on the economy the more important is the negative pollution externality the larger will be the optimal long run growth rate which may be either positive or negative in the case of a positive human capital externality consumption in the market economy may approach zero in the long run although positive consumption growth is socially optimal growth enhancing policies do not necessarily cause a larger drain in the resource stock

unilateral climate policy and the green paradox extraction costs matter i analyze the effect of unilateral climate policies in a two country model where fossil fuel extraction costs depend on both current extraction and remaining stock and where a constant marginal cost clean substitute is available an intensification of climate policy in the country with an initially stricter policy does not increase early fossil fuel extraction i e there is no weak green paradox or the present value of pollution costs i e there is no strong green paradox if energy demand in that country is initially met with a mix of fossil fuel and a substitute whether a stricter climate policy in the country with an initially laxer policy causes a weak green paradox depends on the price elasticity of energy demand and the strength of the flow and stock dependence of extraction costs if the reduction of total extraction is sufficiently strong it overcompensates for a weak green paradox with respect to pollution costs thus a weak green paradox does not necessarily imply a strong green paradox due to stock dependence politique climatique unilaterale et paradoxe vert l incidence des couts d extraction l article analyse l effet des politiques climatiques unilaterales dans un modele a deux pays ou les couts d extraction de combustibles fossiles dependent a la fois de l extraction actuelle et du stock residuel et ou la disponibilite d un substitut energetique propre et constant a cout marginal demeure une intensification des politiques climatiques dans le pays de pair avec une politique initialement plus stricte n augmente ni l extraction precoce des combustibles fossiles c est a dire qu il n y a pas de paradoxe vert faible ni la valeur actuelles des couts de pollution c est a dire qu il n y a pas de paradoxe vert accru x00ab pour autant que la demande en energie dans ce pays est initialement satisfaite par une combinaison d un combustible fossile et d un substitut qu une politique climatique plus stricte dans ce pays dote d une politique initialement plus laxiste entrane un paradoxe vert moins prononce depend de l elasticite par rapport au prix de la demande d energie de l importance du flux et de la dependance en matiere de stock relativement aux couts d extraction si une reduction de l extraction totale est suffisamment forte elle surcompensera un paradoxe vert limite relativement aux couts de pollution ainsi un faible paradoxe vert n engendre pas necessairement un fort paradoxe vert en raison de la dependance au stock

approximate dynamic programming for lateral transshipment problems in multi location inventory systems abstract companies commonly allocate their inventories across multiple locations based on their historical sales rates however random fluctuations in customer purchases such as those caused by weather conditions and other external factors might cause significant deviations from expected demand leading to excess stock in some locations and stockouts in others to fix this mismatch companies often turn to lateral transshipments e g the movement of stock between locations of the same echelon in this paper we examine multi location inventory systems under periodic review with multiple opportunities for proactive transshipments within one order cycle if stockouts occur demand is lost with no opportunity to backorder the objective of our model is to find an optimal policy that indicates the sources and the destinations of transshipments as well as the number of units to maximise the profit of the network we create a dynamic program that can in principal be solved to optimality using bellman s equation however the size of the state and decision spaces makes it impossible to find the optimal policy for real world sized problem instances thereby we use forward approximate dynamic programming to find a near optimal transshipment policy finally we conduct an extensive numerical study to gauge the performance of our transshipment policy for small size instances we compare our policy to the optimal one for larger scale instances we consider other practically oriented heuristics our numerical experiments show that our proposed algorithm performs very well compared to state of the art methods in the literature

an overlapping generations model with exhaustible resources and stock pollution this paper analyzes the nexus between resource exhaustion and pollution externality using an overlapping generations framework where each generation lives only for a finite period for a finite horizon model with production where there are many agents per generation the pareto inefficiency arises due to lack of intragenerational coordination and is propagated across generations the tax rates necessary for correcting this externality are characterized we also derive a modified hotelling rule according to which the equilibrium resource price rises slower than the rate of interest in order to account for the damages due to the pollution stock generated by the resource used for the case where the externality induced damage acts on production rather than the utility function pareto inefficiency is shown to persist even when there is intragenerational coordination

cycles in nonrenewable resource prices with pollution and learning by doing we study how environmental regulation in the form of a cap on aggregate emissions from a fossil fuel e g coal interacts with the arrival of a clean substitute e g solar energy the cost of the substitute is assumed to decrease with cumulative use because of learning by doing we show that optimal energy prices may initially increase because of pollution regulation but fall due to learning and rise again because of scarcity of the resource finally falling after transition to the clean substitute thus nonrenewable resource prices may exhibit cyclical behavior even in a purely deterministic setting

the effect of macroeconomic news on stock returns new evidence from newspaper coverage abstract previous literature has produced weak evidence to support the hypothesis that real economic news affects stock returns this is in part attributed to the difficulty of measuring how investors interpret macroeconomic announcements in different economic environments in this paper we choose a different approach of measuring macroeconomic news to better estimate its effect on stock returns since newspaper stories provide an interpretation of the statistical releases we choose newspaper stories as our measure of news our findings indicate that news about gdp and unemployment does affect stock returns

bounded influence estimator for garch models evidence from foreign exchange rates previous research indicates that the maximum likelihood estimates of generalized autoregressive conditional heteroscedasticity garch models on foreign exchange rates under various distributional assumptions are sensitive to the presence of outliers the advantage of the proposed bounded influence estimator bie is that it limits the influence of a small subset of data and is asymptotically normal the bie provides more consistent and robust estimates than maximum likelihood estimator mle and semi parametric estimator both of which tend to underestimate volatility persistence due to outliers it is thus robust to outliers and model misspecification results of bie estimates of garch models on the exchange rate series of five major currencies indicate that bie offers an efficient mechanism for down weighting outlying observations and is a competitive alternative to mle

political news and stock prices the case of saddam hussein contracts abstract this paper studies the association between the market s expectations of saddam hussein s fall from power as reflected in saddam contract prices and stock prices oil prices and exchange rates during the war a rise in the probability of saddam s fall which also indicated a speedy end to the war was positively and significantly associated with stock prices strengthened the dollar against the euro and lowered oil prices before the war a rise in the probability of saddam s fall which may also have indicated the probability of a costly war breaking out lowered stock prices which adjusted gradually to this information

is there really a green paradox abstract in the absence of a co2 tax the anticipation of a cheaper renewable backstop increases current emissions of co2 since the date at which renewables are phased in is brought forward and more generally future emissions of co2 will decrease the effect on global warming is unclear green welfare falls if the backstop is relatively expensive and full exhaustion of fossil fuels is optimal but may increase if the backstop is sufficiently cheap relative to the cost of extracting the last drop of fossil fuels plus marginal global warming damages as then it is attractive to leave more fossil fuels unexploited and thus limit co2 emissions we establish these results by analyzing depletion of non renewable fossil fuels followed by a switch to a clean renewable backstop paying attention to timing of the switch and the amount of fossil fuels remaining unexploited we also discuss the potential for limit pricing when the non renewable resource is owned by a monopolist finally we show that if backstops are already used and more backstops become economically viable as the price of fossil fuels rises a lower cost of the backstop will either postpone fossil fuel exhaustion or leave more fossil fuel in situ thus boosting green welfare however if a market economy does not internalize global warming externalities and renewables have not kicked in yet full exhaustion of fossil fuel will occur in finite time and a backstop subsidy always curbs green welfare

optimal joint replenishment and transshipment policies in a multi period inventory system with lost sales mismatch between supply and demand when the uncertainty of the demand is high and the supply lead time is relatively long such as seasonal good markets can result in high overstocking and understocking costs in this paper we propose transshipment as a powerful mechanism to mitigate the mismatch between the supply and demand we consider a finite horizon multi period inventory system where in each period two retailers have the option to replenish their inventory from a supplier if there is any supply or via transshipment from the other retailer each retailer observes nonnegative stochastic demand with general distribution in each period and incurs overstocking understocking costs as well as costs for replenishment and transshipment that may be time dependent we study a stochastic control problem where the objective is to determine the optimal joint replenishment and transshipment policies so as to minimize the total expected cost over the season we characterize the structure of the optimal policy a

pre announcement effects news effects and volatility monetary policy and the stock market abstract i examine pre announcement and news effects on the stock market in the context of public disclosure of monetary policy decisions the results suggest that the stock market tends to be relatively quiet conditional volatility is abnormally low on days preceding regularly scheduled policy announcements although this calming effect is routinely reported in anecdotal press accounts it is statistically significant only over the past four to five years a result that i attribute to changes in the federal reserve s disclosure practices in early 1994 the paper also looks at how the actual interest rate decisions of policy makers affect stock market volatility the element of surprise in such decisions tends to boost stock market volatility significantly in the short run and positive surprises higher than expected values of the target federal funds rate tend to have a larger effect on volatility than negative surprises the implications of the results for broader issues in the finance and economics literatures are also discussed

ordering the extraction of polluting nonrenewable resources energy markets are often characterized by the use of multiple nonrenewable resources such as coal and natural gas with different pollution characteristics the same resource may have different qualities as when high and low sulfur coal is used to generate electricity multiple resources are used in providing transportation services such as cars running on gasoline or plug in hybrids that may be fueled by electricity produced from coal when these nonrenewable resources contribute differentially to pollution what is the opti mal sequence of extraction over time harold hotelling 1931 developed the classical theory of extraction of a nonrenewable resource orris c herfindahl 1967 extended the hotelling model by considering many resources with different unit costs of extraction and proposed the least cost first principle extraction must be ordered by cost with the cheapest resource used first others have examined whether herfindahl s model remains valid in a variety of situations in a general equilibrium setting see murray kemp and ngo v long 1980 tracy r lewis 1982 in the presence of setup costs g rard gaudet moreaux and stephen w salant 2001 under het erogeneous demands chakravorty and darrell l krulce 1994 and when the extraction rate is constrained jean pierre amigues et al 1998 stephen p holland 2003 in these studies following hotelling and herfindahl resources were differentiated by cost alone in this paper we abstract from cost considerations and focus on how the sequence of extraction may be affected when resources are differentiated only by their pollution character istics we consider two resources one more polluting than the other without loss of generality consider coal to be the dirty resource and natural gas the clean one both may be used to generate electricity environmental regulation is imposed through a cap on the stock of pollution this may be a stylized approximation of an international agreement such as the kyoto protocol which aims to stabilize the concentration of greenhouse gases in the atmosphere 1 with heterogeneity in pollution the results are nonintuitive and do not depend on the emis sion rates of the resources when the economy is already at its allowable stock of pollution the clean natural gas is used first and use of the dirty coal is postponed to the future this is what one would expect armed with insights from the herfindahl model however when the economy starts from below the ceiling and accumulates pollution coal may be used first and use of the clean natural gas is postponed the optimal strategy is to benefit from natural dilution by build ing the stock of pollution as quickly as possible this is done by burning coal rather than natural

world war ii events and the dow jones industrial index abstract this paper investigates which events of world war ii wwii the us investors at that time considered as turning points structural breaks of the war the empirical study employs daily dow jones industrial average stock index and volatility from january 1939 to december 1945 and applies structural shift oriented test to determine endogenously the structural breaks during the wwii period results show that the majority of the wartime events on and off the battlefield labelled important by historians did result in structural breaks in both price movement and stock returns volatility risk these results have major implications for investors of the present and future

abatement r d and growth with a pollution ceiling abstract the consequences of the 2 c climate target and the implicitly imposed ceiling on co2 have been analyzed in several studies we use an endogenous growth model with a ceiling and an abatement option to study the effect of the ceiling on the allocation of limited funds for r d abatement and capital accumulation it is found that the advantagenousness of abatement rises with the cost advantage of fossil fuel versus backstop if the cost advantage is sufficiently large at some point in time it outweighs the costs of abatement and the gains of r d and capital accumulation the reallocation of production towards abatement may cause an increase or decrease in long run consumption in the latter case abatement allows an intertemporal consumption trade off which may even justify the disregard of everlasting growth in case of stock dependent fossil fuel costs an abatement induced speed up of technology development may cause an increase in fossil fuel stock left in situ

stocking decisions for low usage items in a multilocation inventory system this research shows that organizations with a number of sister plants warehouses or other stocking points can profit from the concept of proactive use of transshipments as an element of their inventory control policy for certain types of parts employing transshipments can significantly reduce the total inventory needed throughout the entire collection of stocking points the study is motivated by a real life situation involving a large utility company having 29 power generating plants in five southeastern states where there are thousands of parts that are commonly used at multiple plants at present each plant operates independently and maintains enough stock to meet its own requirements transshipments take place between plants whenever there is an emergency requirement for a part but no explicit consideration is given to this effect while deciding on stocking levels at different plants in the case we examined by setting stocking levels to explicitly take account of transshipments total system cost could be reduced by about 70 over the company s decentralized policy in general this work considers a single echelon n location continuous review inventory system in which complete pooling of stock is permitted among the locations a model is developed for slow moving expensive and consumable parts that are common to two or more locations a one for one ordering policy and queueing theory allow development and solution of a system of equations for the probability distribution of net inventory at each location a heuristic procedure is also developed to determine cost effective stocking levels actual data from the utility company are used to demonstrate the applicability of the model savings achieved as a result of pooling are reported

macroeconomic news announcements and stock market jump intensity dynamics abstract this paper examines the effect of macroeconomic releases on stock market volatility through a poisson gaussian garch process with time varying jump intensity which is allowed to respond to such information the day of the announcement per se is found to have little impact on jump intensities employment releases are an exception however when macroeconomic surprises are considered inflation shocks show persistent effects while monetary policy and employment shocks reveal only short lived effects also the jump intensity responds asymmetrically to macroeconomic shocks evidence on macroeconomic variables relevance in explaining jump dynamics and improving volatility forecasts on event days is provided

the supply side of co2 with country heterogeneity several recent articles have analyzed climate policy paying explicit attention to the fact that carbon resources are non renewable in most of this body of literature the economy is treated as a single unit and in the context of climate policy it seems reasonable to interpret this as the whole world however carbon taxes and other climate policies differ substantially across countries with such heterogeneity the effects on the emission paths of changes in taxes costs and subsidies might be very different from what is found for a hypothetical world of identical countries

scarcity growth and r d abstract the limits to economic growth due to resource scarcity can be alleviated only by the development of backstop substitutes this paper combines resource based economic growth with r d to reduce the cost of backstop technologies characterizing the entire dynamics of optimal growth and r d processes we find that an economy s growth prospects depend on its type as determined by its production technology and learning ability and by its knowledge capital endowment a wide variety of growth patterns emerges ranging from cases in which an economy that without r d eventually stagnates converges to a steady state is diverted by r d onto a path of sustained growth to cases in which r d is not warranted resource scarcity is shown to encourage r d due to the increased reliance on the backstop technology

optimal timing of ccs policies with heterogeneous energy consumption sectors using the chakravorty et al j econ dyn control 30 2875 2904 2006 ceiling model we characterize the optimal consumption paths of three energy resources dirty oil which is non renewable and carbon emitting clean oil which is also non renewable but carbon free thanks to an abatement technology and solar energy which is renewable and carbon free the resulting energy mix can supply the energy needs of two sectors these sectors differ in the additional abatement cost they have to pay for consuming clean rather than dirty oil as sector 1 industry can abate its emissions at a lower cost than sector 2 transport we show that it is optimal to begin by fully capturing sector 1 s emissions before the ceiling is reached also there may be optimal paths along which the capture devices of both sectors must be activated in this case sector s 1 emissions are fully abated first before sector 2 abates partially finally we discuss the way heterogeneity of abatement costs causes sectoral energy price paths to differ

optimal pricing of environmental and natural resource use with stock externalities abstract underlying some of the most pressing environmental problems are the interlinked resource and environmental stock externalities with threshold effects using a simple dynamic model it is shown how in the face of such externalities the static market based policy instruments such as pigouvian taxes should be modified it is shown that even if for an initial period there is going to be no pollution stock damage the optimal policy still requires that abatement begins immediately and at increasing rates simulation of the model for the case of fossil fuel burning and the consequent global warming shows that the optimal carbon tax and therefore the optimal control strategy is particularly sensitive to changes in the marginal abatement cost and the level of fossil fuel demand policy simulations contrast the optimal control policy with and estimate the welfare losses from alternative policies deriving from arbitrary tax paths the latter include i a no tax policy ii a constant carbon tax rate iii the european community s proposed carbon tax path and iv a delayed optimal tax path

large shocks small shocks and economic fluctuations outliers in macroeconomic time series summary we analyse fifteen post world war i1 us macroeconomic time series using a modified outlier identification procedure based on tsay 1988a large shocks appear to be present in all the series we examined furthermore there are three basic outlier patterns i outliers seem to be associated with business cycles 2 outliers are clustered together both over time and across series 3 there appears to be a dichotomy between outlier behaviour of real versus nominal series also after controlling for outliers much of the evidence of non linearity in many of the time series is eliminated

the economics of ccs why have ccs technologies not had an international breakthrough abstract eleven years on since the united nations intergovernmental panel on climate change was awarded the nobel peace prize in recognition of its efforts in combating climate change fossil fuels remain the most dominant global energy source as the total replacement of fossil fuel energy is not expected to take place immediately in the near future the international energy agency has repeatedly declared carbon capture and sequestration ccs as a key technology for mitigating climate change however ccs lacks the scale required for substantial reduction in carbon dioxide emissions from fossil fuel power generation even though ccs is one of the key technologies for mitigating climate change why has this technology not had an international breakthrough to shed light on this question this paper employs a simple model of energy generation scrutinizes the economic drivers of ccs based on the analytical results and discusses the possible obstacles that can prevent a widespread rollout of the technology this is followed by a state of the art in literature pertaining to the economics of ccs and a discussion that points to a dichotomy between the economic theory and reality the study concludes with some policy suggestions and directions for future research

the multiperiod multilocation inventory problem this paper studies the structure of optimal policies in general multiperiod multilocation inventory problems with proportional costs it is shown that the multiperiod problem has the same generic form in each period as a one period problem hence properties of the one period problem are inherited by the multiperiod formulation in particular the form of the optimal policy can be characterized in the special case of a leontief system structure and for a somewhat more general class it is shown that base stock policies are optimal for certain initial states for the stationary problem some results are derived about the monotonicity of the sequence of base stock vectors

approximations of dynamic multilocation production and inventory problems consider a central depot or plant which supplies several locations experiencing random demands orders are placed or production is initiated periodically by the depot the order arrives after a fixed lead time and is then allocated among the several locations the depot itself does not hold inventory the allocations are finally received at the demand points after another lag unfilled demand at each location is backordered linear costs are incurred at each location for holding inventory and for backorders also costs are assessed for orders placed by the depot the object is to minimize the expected total cost of the system over a finite number of time periods this system gives rise to a dynamic program with a state space of very large dimension we show that this model can be systematically approximated by a single location inventory problem all the qualitative and quantitative results for such problems can then be applied

shifts in volatility driven by large stock market shocks abstract this paper presents an extension of the stochastic volatility model which allows for level shifts in volatility of stock market returns known as structural breaks these shifts are endogenously driven by large return shocks innovations reflecting large pieces of market news these shocks are identified from the data as being bigger in absolute terms than the values of two threshold parameters of the model one for the negative shocks and one for the positive shocks the model can be employed to investigate different sources of stock market volatility shifts driven by market news without relying on exogenous information in addition to this it has a number of interesting features which enable us to study the effects of large return shocks on future levels of market volatility the above properties of the model are shown based on a study for the us stock market volatility

the impact of terrorism on financial markets an empirical study the main focus of this paper is to previous termstudynext term empirically the previous termimpact of terrorismnext term on the behavior of stock bond and commodity previous termmarkets next term we consider terrorist events that took place in 25 countries over an 11 year time period and implement our analysis using different methods an event previous termstudynext term approach a non parametric methodology and a filtered garch evt approach in addition we compare the effect of terrorist attacks on previous termfinancial markets with the impactnext term of other extreme events such as previous termfinancialnext term crashes and natural catastrophes the results of our analysis show that a non parametric approach is the most appropriate method among the three for analyzing the previous termimpact of terrorism on financial markets next term we demonstrate the robustness of this method when interest rates equity previous termmarketnext term integration spillover and contemporaneous effects are controlled we show how the results of this approach can be used for investors portfolio diversification strategies against previous termterrorismnext term risk

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

endogenous growth with a limited fossil fuel extraction capacity campbell 1980 and following authors have discussed a limited resource extraction capacity as an augmentation of the well known hotelling model we integrate a limited extraction capacity and related investments in the endogenous growth model of tsur and zemel 2005 to study its effect on economic development the capacity constraint gives rise to three effects on the one hand higher energy costs and the reallocation of production towards capacity investments decrease production available for consumption research and or capital investments energy costs and reallocation effect on the other hand research investments may increase which boosts available production research effect depending on the capital endowment and the strength of the effects long run consumption may be boosted or depressed in particular the capacity constraint may render everlasting consumption growth non optimal in a resource rich economy furthermore we find that capacity investments may be postponed to later points in time if the capital endowment is high

output growth and its volatility the gold standard through the great moderation this study examines the relationship between u s output growth and its volatility over the period 1876 i to 2012 ii we adjust the data for outliers and structural breaks we employ generalized autoregressive conditional heteroskedasticity garch and exponential garch egarch specifications normality and homoskedasticity appear only in the garch or egarch model that corrects for the outliers when including the break in the mean equation high volatility persistence remains after also accommodating the breaks in the variance equation the integrated garch effect proves spurious either for the symmetric or the asymmetric model finally our empirical results suggest that the finding of higher output growth volatility stimulating output growth and higher output growth reducing its volatility obtained from the symmetric garch in mean garch m model also proves spurious as a result of the emergence of an asymmetric effect our more appropriately specified asymmetric egarch m model suggests positive volatility in mean and level effects in the long period real gross national product series

the adjustment of stock prices to information about inflation this paper analyzes the reaction of stock prices to the new information about inflation based on daily returns to the standard and poor s composite portfolio from 1953 78 it seems that the stock market reacts negatively to the announcement of unexpected inflation in the consumer price index c p i although the magnitude of the reaction is small it is interesting to note that the stock market seems to react at the time of announcement of the c p i approximately one month after the price data are collected by the bureau of labor statistics

fossil fuels stock externalities and backstop technology the hotelling exhaustible resource model is extended to include stock pollution and nonpolluting backstop technology it is shown that an optimal energy consumption strategy typically includes a regime in which the two energy sources are consumed simultaneously along this regime fossil fuel consumption decreases and backstop consumption increases together fossil fuel and backstop consumption may form eleven optimal regime combinations a decrease in the backstop price decreases the initial level of optimal emission tax

the reconstruction finance corporation the gold standard and the banking panic of 1933 the banking crisis of 1933 which forced a national holiday closing the entire u s financial system is often blamed on either publication of the names of banks borrowing from the reconstruction finance corporation a speculative run on the gold backed dollar due to fears that president elect roosevelt would devalue the currency or both evidence presented here indicates that neither factor started the final banking crisis of the depression the michigan bank holiday ignited the panic resulting in a series of bank holidays and a run on the dollar this chain of events toppled the united states financial system

no place to hide the global crisis in equity markets in 2008 2009 this paper provides a broad analysis of the effect of the current financial crisis on global equity markets and their major components we also examine the magnitude of the crisis in terms of value destruction in comparison to other market crashes in brief upon looking at return performance across an array of regions countries and sectors broad market averages are down approximately 40 on their end of 2006 levels while deterioration started in most markets in early to mid 2008 the crisis period of mid september to the end of october 2008 is responsible for the lion s share of the collapse with just about all indices falling 30 40 in this short period financial sectors have taken a bigger hit than non financials over the period though they both suffered similarly during the peak of the crisis due to larger rises in 2007 the emerging markets drop more in 2008 than developed markets but in large part end up at the same level as the other markets the global nature of the crisis is also apparent from the high correlations between markets and investment styles that further increased during the crisis as a result diversification provided little help to investors when needed most as markets dropped in tandem

black swans before the black swan evidence from international libor ois spreads abstract the libor ois spread is a closely monitored indicator of the financial health of economy previous research has used this spread to identify and anticipate abrupt changes in financial markets taylor and williams 2009 refer to the drastic increase in the us libor ois spread on august 7th 2007 as a black swan in the money market in this paper rather than rely on visual observations of black swans we estimate them using bai and perron s 1998 procedure we estimate structural breaks granger causality tests and innovation accounting in international libor ois spreads and a cds index to better understand their dynamics during the recent crisis our results reveal that black swans appeared in smaller economies prior to that in large ones during the financial crisis in addition we find that only shocks to the us libor ois spread has any statistically significant effects after 30 days

estimating garch volatility in the presence of outliers garch volatilities depend on the unconditional variance which is a non linear function of the parameters consequently they can have larger biases than estimated parameters using robust methods to estimate both parameters and volatilities is shown to outperform maximum likelihood procedures

local versus international crises and bank stability does bank foreign expansion make a difference abstractwe investigate the impact of global and local crises on bank stability in the mena region and examine the effect of owning bank subsidiaries in other countries we consider banks that experienced both types of crises during our sample period our findings highlight a negative impact of the global financial crisis of 2007 2008 on bank stability but on the whole no negative impact of the local crisis a deeper investigation shows that owning bank subsidiaries outside the home country is a source of increased fragility during normal times yet a source of higher stability during the local crisis but not during the international crisis moreover owning foreign subsidiaries in one or two world regions is insufficient to neutralize both types of crises while being present in three or more regions is more stabilizing during a local crisis but also more destabilizing during an international crisis our findings contribute to the literature examining bank stability and have several policy implications

volatility persistence in crude oil markets financial market participants and policy makers can benefit from a better understanding of how shocks can affect volatility over time this study assesses the impact of structural changes and outliers on volatility persistence of three crude oil markets brent west texas intermediate wti and organization of petroleum exporting countries opec between january 2 1985 and june 17 2011 we identify outliers using a new semi parametric test based on conditional heteroscedasticity models these large shocks can be associated with particular event patterns such as the invasion of kuwait by iraq the operation desert storm the operation desert fox and the global financial crisis as well as opec announcements on production reduction or us announcements on crude inventories we show that outliers can bias i the estimates of the parameters of the equation governing volatility dynamics ii the regularity and non negativity conditions of garch type models garch igarch figarch and hygarch and iii the detection of structural breaks in volatility and thus the estimation of the persistence of the volatility therefore taking into account the outliers on the volatility modelling process may improve the understanding of volatility in crude oil markets

endogenous discounting and climate policy under risk of abrupt climate change the occurrence hazard is added to the social discount rate as a result the social discount rate 1 increases and 2 turns endogenous to the global warming policy the second effect bears profound policy implications that are magnified by economic growth in particular we find that greenhouse gases ghg emission should be terminated at a finite time so that the ensuing occurrence risk will vanish in the long run due to the public bad nature of the catastrophic risk the second effect is ignored in a competitive allocation and unregulated economic growth will give rise to excessive emissions in the long term the ghg emission paths under the optimal and competitive growth regimes lie at the extreme ends of the range of feasible emissions

a hotelling model with a ceiling on the stock of pollution abstract environmental agreements such as the kyoto protocol aim to stabilize the amount of carbon in the atmosphere which is mainly caused by the burning of nonrenewable resources such as coal we characterize the solution to the textbook hotelling model when there is a ceiling on the stock of emissions we consider both increasing and decreasing demand for energy we show that when the ceiling is binding both the low cost nonrenewable resource and the high cost renewable resource may be used jointly a key implication is that if energy demand were to decline in the long run we may supplement energy supply through clean renewables to meet the environmental standard but then revert back to using only dirty fossil fuels in the future when the ceiling has become non binding that is the much heralded societal transition to clean energy resources may be short lived

flattening the carbon extraction path in unilateral cost effective action internalizing the global negative externality of carbon emissions requires the flattening of the extraction path of world fossil energy resources world carbon emissions we consider governments with sign unconstrained emission taxes at their disposal and seeking to prevent world emissions from exceeding some binding aggregate emission ceiling in the medium term such a ceiling policy can be carried out either in full cooperation or by a sub global climate coalition unilateral action has to cope with carbon leakage and high costs which makes a strong case for choosing a policy that implements the ceiling in a cost effective way in a two country two period general equilibrium model with a non renewable fossil energy resource we characterize the unilateral cost effective ceiling policy and compare it with its fully cooperative counterpart we show that with full cooperation there exists a cost effective ceiling policy in which only first period emissions are taxed at a rate that is uniform across countries in contrast the cost effective ceiling policy of a sub global climate coalition is characterized by emission regulation in both periods the share of the total stock of energy resources owned by the sub global climate coalition turns out to be a decisive determinant of the sign and magnitude of unilateral cost effective taxes

optimal and approximate policies in multiperiod multilocation inventory models with transshipments this paper examines the effects on the optimal ordering policy and its cost of allowing for interactions among retail outlets specifically transshipments are allowed as recourse actions occurring after demands are realized but before they must be satisfied the resultant savings in holding and shortage costs are balanced against the costs of transshipment a base stock ordering policy is optimal for this model if the final period base stock order up to point is nonnegative then it will be the base stock order up to point for all periods unfortunately it can be found analytically only for two special cases where either the cost parameters are equal at every outlet or there are only two outlets these two special cases are used to validate a heuristic solution technique employing monte carlo integration which is then compared to an easily calculated base policy in order to gauge the contribution of this model the additional savings from using this heuristic policy are significant particularly for problems with many retail outlets and low transshipment costs

structural vector autoregressions with nonnormal residuals in structural vector autoregressive svar modeling sometimes the identifying restrictions are insufficient for a unique specification of all shocks in this paper it is pointed out that specific distributional assumptions can help in identifying the structural shocks in particular a mixture of normal distributions is considered as a possible model that can be used in this context our model setup enables us to test restrictions which are just identifying in a standard svar framework the results are illustrated using a u s macro data set and a system of u s and european interest rates

jumps in financial markets a new nonparametric test and jump dynamics this paper introduces a new nonparametric test to detect jump arrival times and realized jump sizes in asset prices up to the intra day level we demonstrate that the likelihood of misclassiflcation of jumps becomes negligible when we use high frequency returns using our test we examine jump dynamics and their distributions in the u s equity markets the results show that individual stock jumps are associated with prescheduled earnings announcements and other company speciflc news events additionally s p 500 index jumps are associated with general market news announcements this suggests difierent pricing models for individual equity options versus index op

endogenous growth with a ceiling on the stock of pollution the effects of an agreement such as the kyoto protocol which implicitly imposes a ceiling on the stock of pollution have recently been studied in hotelling models we add pollution and a ceiling to the endogenous growth model of tsur and zemel j environ econ manag 49 3 484 499 2005 to study the effects of the ceiling and pollution on capital and research investments in the short run the ceiling adds an additional scarcity to the one induced by the limited fossil fuel stock ceteris paribus the extraction rate of cheap fossil fuel is reduced and backstop utilization boosted this increases energy costs energy cost effect and makes r d more beneficial compared with capital accumulation research effect r d investments may increase depending on capital endowment and the strength of the two effects the sum of r d and capital investments is affected as both effects change disposable production in the long run i e after the exhaustion of limited resources the shape of the evolution path can be only affected by the ceiling if the capital endowment is sufficiently large

testing for arch in the presence of additive outliers in this paper we investigate the properties of the lagrange multiplier lm test for autoregressive conditional heteroskedasticity arch and generalized arch garch in the presence of additive outliers ao s we show analytically that both the asymptotic size and power are adversely affected if ao s are neglected the test rejects the null hypothesis of homoskedasticity too often when it is in fact true while the test has difficulty detecting genuine garch effects several monte carlo experiments show that these phenomena occur in small samples as well we design and implement a robust test which has better size and power properties than the conventional test in the presence of ao s applications to the french industrial production series and weekly returns of the spanish peseta us dollar exchange rate reveal that sometimes apparent garch effects may be due to only a small number of outliers and conversely that genuine garch effects can be masked by outliers

large shocks in the volatility of the dow jones industrial average index 1928 2013 we determine the events that cause large shocks in volatility of the djia index over the period 1928 2013 using a new semi parametric test based on conditional heteroscedasticity models we find that these large shocks can be associated with particular events financial crashes elections wars monetary policies etc we show that some shocks are not identified as extraordinary movements by the investors due to their occurring during high volatility episodes especially the 1929 1934 1937 1938 and 2007 2011 periods

caviar conditional autoregressive value at risk by regression quantiles value at risk var has become the standard measure of market risk employed by financial institutions for both internal and regulatory purposes var is defined as the value that a portfolio will lose with a given probability over a certain time horizon usually one or ten days despite its conceptual simplicity its measurement is a very challenging statistical problem and none of the methodologies developed so far give satisfactory solutions interpreting the var as the quantile of future portfolio values conditional on current information we propose a new approach to quantile estimation which does not require any of the extreme assumptions invoked by existing methodologies such as normality or i i d returns the conditional autoregressive value at risk or caviar model moves the focus of attention from the distribution of returns directly to the behavior of the quantile we specify the evolution of the quantile over time using a special type of autoregressive process and use the regression quantile framework introduced by koenker and bassett to determine the unknown parameters since the objective function is not differentiable we use a differential evolutionary genetic algorithm for the numerical optimization utilizing the criterion that each period the probability of exceeding the var must be independent of all the past information we introduce a new test of model adequacy the dynamic quantile test applications to simulated and real data provide empirical support to this methodology and illustrate the ability of these algorithms to adapt to new risk environments

a lagrange multiplier test for garch models abstract this paper extends the lagrange multiplier lm test to testing noise disturbances against garch disturbances in the linear regression model the resulting lm test for the garch alternative is identical to the lm test for an arch alternative