distinguishing between whole farm vs partial farm participation in the conservation reserve program by distinguishing between the decision to participate in the conservation reserve program crp and the decision for whole farm vs part farm participation we model participation as separate binary decisions our results suggest the farm characteristics and other factors affect the decision to participate in crp differently than the decision regarding whole farm vs part farm participation this model formulation also helps to clarify the conditions under which the effect of crp payments on the acreage enrolled in the program is positive or negative

cross hedging minimum return guarantees basis and liquidity risks we reveal pitfalls in the hedging of insurance contracts with a minimum return guarantee on the underlying investment e g an external mutual fund we analyze basis risk entailed by hedging the guarantee with a dynamic portfolio of proxy assets for the funds we also take account of liquidity risk which arises since the insurer may need to advance funds for performing the hedge based on a least squares monte carlo simulation we study the economic implications of basis and liquidity risks we demonstrate that both risks may be surprisingly high and show how the design of the contract and the hedging strategy may help to alleviate them

the effect of asymmetries on optimal hedge ratios there is widespread evidence that the volatility of stock returns displays an asymmetric response to good and bad news this article considers the impact of asymmetry on time varying hedges for financial futures an asymmetric model that allows forecasts of cash and futures return volatility to respond differently to positive and negative return innovations gives superior in sample hedging performance however the simpler symmetric model is not inferior in a hold out sample a method for evaluating the models in a modern risk management framework is presented highlighting the importance of allowing optimal hedge ratios to be both time varying and asymmetric

incentive compatible pollution control policies under asymmetric information on both risk preferences and technology this article proposes a method to accommodate asymmetric information on farmers risk preferences in designing voluntary environmental policies by incorporating stochastic efficiency rules in a mechanism design problem the government can find incentive compatible policies by knowing only the general class of risk preferences among farmers the model also accounts for hidden information on technology types and input use the method is applied empirically to simulate a pollution control program in new york results suggest that participation incentives would be inadequate for many risk averse producers if the government does not account for the diversity in risk preferences

optimal hedging and spreading in cointegrated markets abstract assuming that cash and futures markets are cointegrated this article derives the optimal multiperiod hedging strategy the model is then extended to the case of two futures markets optimal intramarket or intermarket spreading strategy is provided therein

bivariate garch estimation of the optimal commodity futures hedge six different commodities are examined using daily data over two futures contract periods cash and futures prices for all six commodities are found to be well described as martingales with near integrated garch innovations bivariate garch models of cash and futures prices are estimated for the same six commodities the optimal hedge ratio ohr is then calculated as a ratio of the conditional covariance between cash and futures to the conditional variance of futures the estimated ohrs reveal that the standard assumption of a time invariant ohr is inappropriate for each commodity the estimated ohr path appears non stationary which has important implications for hedging strategies

a bivariate markov regime switching garch approach to estimate time varying minimum variance hedge ratios this article develops a new bivariate markov regime switching bekk generalized autoregressive conditional heteroscedasticity garch rs bekk garch model the model is a state dependent bivariate bekk garch model and an extension of gray s univariate generalized regime switching grs model to the bivariate case to solve the path dependency problem inherent in the bivariate regime switching bekk garch model we propose a recombining method for the covariance term in the conditional variance covariance matrix the model is applied to estimate time varying minimum variance hedge ratios for corn and nickel spot and futures prices out of sample point estimates of hedging portfolio variance show that compared to the state independent bekk garch model the rs bekk garch model improves out of sample hedging effectiveness for both corn and nickel data we perform white s 2000 data snooping reality check to test for predictive superiority of rs bekk garch over the benchmark model and find that the difference

trend stationary of inflation rates evidence from lm unit root testing with a long span of historical data the article applies the lm univariate unit root test recently developed by lee and strazicich 2003 2004 to re examine the validity of trend stationary in the inflation rates of 11 oecd and asian countries using a longer span of historical data our empirical findings are favourable to the trend stationary of the inflation rates when we control the structural breaks in series and therefore they point to the absence of hyperinflation in the majority of the countries the results indicate that shocks to inflation rates are temporary and soon converge with the inflation rates being trend stationary hence most structural breaks in the inflation rate occur around the great depression world war i world war ii and energy shock periods for the convergence effect we repeat the unit root tests utilized above for smaller sub samples so as to provide a robust analysis the outcomes show that by selecting a longer data span we can catch more powerful convergent evidence overall some policy implications a

revenue neutral tax policies under price uncertainty the firm s response to revenue neutral taxation is investigated under price uncertainty revenue neutral policies adjust simultaneously the marginal tax rate and the level of exemptions while keeping expected tax receipts constant nonincreasing absolute risk aversion is sufficient to sign the firm s response a reduction in the marginal rate causes the firm to contract output implications are established for the equilibrium level of treasury receipts

the dynamics of stock index and stock index futures returns in rational efficiently functioning markets the returns on stock index and stock index futures contracts should be perfectly contemporaneously correlated this study investigates the time series properties of 5 minute intraday returns of stock index and stock index futures contracts and finds that sp however the effect is not completely unidirectional with lagged stock index returns having a mild positive predictive impact on futures returns

forecasting inflation using interest rate and time series models some international evidence it has been suggested that inflation forecasts derived from short term interest rates are as accurate as time series forecasts previous analyses of this notion have focused on u s data providing mixed results in this article the authors extend previous work by testing the hypothesis using data taken from the united states and five other countries using monthly eurocurrency rates and the consumer price index for the period 1967 86 their results indicate that time series forecasts of inflation have equal or lower forecast errors and have unbiased predictions more often than the interest rate based forecasts copyright 1990 by the university of chicago

the temporal price relationship between s p 500 futures and the s p 500 index this paper empirically examines the intraday price relationship between s p 500 futures and the s p 500 index using minute to minute data three stage least squares regression is used to estimate lead and lag relationships with estimates for expiration days of the s p 500 futures compared with estimates for days prior to expiration the results suggest that futures price movements consistently lead index movements by twenty to forty five minutes while movements in the index rarely affect futures beyond one minute

european natural gas seasonal effects on futures hedging abstract this paper is the first to discuss the design of futures hedging strategies in european natural gas markets nbp ttf and zeebrugge a common feature of energy prices is that conditional mean and volatility are driven by seasonal trends due to weather demand and storage level seasonalities this paper follows and extends the ederington and salas 2008 framework and considers seasonalities in mean and volatility when minimum variance hedge ratios are computed our results show that hedging effectiveness is much higher when the seasonal pattern in spot price changes is approximated with lagged values of the basis futures price minus spot price this fact remains true for short a week and long one three and six months hedging periods furthermore volatility of weekly price changes also has a seasonal pattern and is higher in winter than in summer a simple volatility seasonal model that is based on sinusoidal functions on the basis improves the risk reduction obtained by strategies in which hedging ratios are estimated with linear regressions seasonal hedging strategies linear regression based strategies or even a naive position perform better than more sophisticated statistical methods

a further analysis of the lead lag relationship between the cash market and stock index futures market the intraday lead lag relation between returns of the major market cash index and returns of the major market index futures and s p 500 futures is investigated empirical results show strong evidence that the futures leads the cash index and weak evidence that the cash index leads the futures the asymmetric lead lag relation holds between the futures and all component stocks including those that trade in almost every five minute interval evidence indicates that when more stocks move together market wide information the futures leads the cash index to a greater degree this suggests that the futures market is the main source of market wide information article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

spatial temporal model of insect growth diffusion and derivative pricing insect derivatives represent an important innovation in specialty crop risk management an active over the counter market in insect derivatives will require a transparent pricing method this paper develops an econometric model of the spatio temporal process underlying a particular insect population and develops a pricing model based on this process we show that insect derivatives can play an important risk management role in mitigating b tabaci whitefly damage in cotton beyond developing a new risk management instrument the key methodological contribution of this paper lies in pricing derivatives with stochastic properties in both space and time dimensions copyright 2008 oxford university press

basis convergence and long memory in volatility when dynamic hedging with futures abstractwhen market returns follow a long memory volatility process standard approaches to estimating dynamic minimum variance hedge ratios mvhrs are misspecified simulation results and an application to the s p 500 index document the magnitude of the misspecification that results from failure to account for basis convergence and long memory in volatility these results have important implications for the estimation of mvhrs in the s p 500 example and other markets as well

estimation of the optimal futures hedge standard approaches to designing a futures hedge often suffer from two major problems first they focus only on minimizing risk so no account is taken of the impact on expected return second in estima ting the hedge ratio no allowance is made for time variation in the distribution of cash and futures price changes this paper describes a technique for estimating the optimal futures hedge that corrects these problems and illustrates its use in hedging treasury bonds with t bond futures copyright 1988 by mit press

does the fisher effect apply in australia the fisher hypothesis claims that changes in the expected inflation rate will be fully reflected in nominal interest rates and hence that real interest rates will remain constant over time evidence with australian data from 1965 to 1990 suggests that the fisher effect does not hold in the long run analysis is performed using recently developed econometric techniques which take account of possible nonstationarity in the date attention is also given to the effects of financial market deregulation on interest rates

arbitrage cointegration and testing the unbiasedness hypothesis in financial markets we use a no arbitrage cost of carry asset pricing model to show that the existence of coin tegration between spot and forward futures prices depends on the time series properties of the cost of carry we argue that the conditions for cointegration are more likely to hold in currency markets than in commodity markets explaining many of the empirical results in the literature we also use this model to demonstrate why the forward rate forecast error the basis and the forward premium are serially correlated and to develop econometric tests ofthe unbiasedness hypothesis sometimes called the simple efficiency hypothesis in various financial markets the unbiasedness hypothesis is so prevalent in the finance liter ature that many tests for it have been developed we examine four of the common tests and and use our cointegration results to demonstrate why each of these tests should reject the null hypothesis of unbiasedness we find strong support for our hypothesis in the existing empirical literature

expo power utility a flexible form for absolute and relative risk aversion a new utility function which i call expo power is proposed that exhibits decreasing constant or increasing absolute risk aversion and decreasing or increasing relative risk aversion depending on parameter values numerical analysis suggests that the expo power function performs well in incorporating these risk preference structures and that arbitrary risk preference specifications may lead to biased risk response estimates

further evidence on the fisher effect the strong form of the fisher hypothesis states that the nominal rate of interest fully adjusts to anticipated inflation weaker forms of the hypothesis identify circumstances where the nominal interest rate either overadjusts or underadjusts previous tests of the hypothesis using australian data and error correction techniques have found conflicting results vector autoregressive innovations are used to estimate the fisher equation and in general the strong form of the hypothesis is rejected in favour of underadjustment however the strong form of the hypothesis cannot be rejected in the period following deregulation of the financial system

searching for a break in gnp it has been suggested that existing estimates of the long run impact of a surprise move in income may have a substantial upward bias due to the presence of a trend break in postwar u s gross national product data this article shows that the statistical evidence does not warrant abandoning the no trend break null hypothesis a key part of the argument is that conventionally computed p values overstate the likelihood of the trend break alternative hypothesis this is because they do not take into account that in practice the date is chosen based on pretest examination of the data

the de merits of minimum variance hedging application to the crack spread we study the empirical performance of the classical minimum variance hedging strategy comparing several econometric models for estimating hedge ratios of crude oil gasoline and heating oil crack spreads given the great variability and large jumps in both spot and futures prices considerable care is required when processing the relevant data and accounting for the costs of maintaining and re balancing the hedge position we find that the variance reduction produced by all models is statistically and economically indistinguishable from the one for one naive hedge however minimum variance hedging models especially those based on garch generate much greater margin and transaction costs than the naive hedge therefore we encourage hedgers to use a naive hedging strategy on the crack spread bundles now offered by the exchange this strategy is the cheapest and easiest to implement our conclusion contradicts the majority of the existing literature which favours the implementation of garch based hedging strategies

pure martingale and joint normality tests for energy futures contracts abstract in this study we empirically analyze to see if the pure martingale hypothesis holds for three energy related commodities crude oil heating oil and natural gas we also test this hypothesis for five different hedging horizons 1 day 1 week 4 week 8 week and 12 week our empirical results show that the pure martingale hypothesis holds for all three commodities and all five horizons this implies that the expected return on futures contract can be ignored in determining the optimal hedge ratio we also test to see if the joint normality between futures and spot returns holds for the same three commodities and five hedging horizons we reject the joint normality hypothesis for all three commodities and five hedging horizons this implies that hedgers with different utility function have different optimal hedge ratios thus in general one needs to take into account of hedger s utility function when deriving optimal hedge ratio our results are robust to pre and post financial crisis as well as some other specifications considered in the paper

joint risk preference technology estimation with a primal system applied studies of the firm in a risky environment have concentrated either on the firm s technology or on its risk preferences these models result in generally inconsistent and inefficient parameter estimates a primal model is proposed which allows a firm s preferences and technology to be estimated jointly in the presence of risk the model is applied to iowa corn production and estimated technology parameters are compared with those from other approaches modest risk aversion leads to inelastic even backbending per acre supplies and input demands yield heteroskedasticity in inputs leads to supply heteroskedasticity in prices especially for risk neutral firms

hedging effectiveness of the hedged portfolio the expected utility maximization subject to the value at risk approach multivariate volatilities and distribution play an important role in portfolio selection and can be used to calculate the value at risk var of a multiple asset financial position this study proposes a new expected utility maximization eum model that accounts for var eum model with a var constraint eum var additionally using the eum var model this study investigates the hedging effectiveness of short and long hedged portfolios constructed with multivariate generalized autoregressive conditional heteroscedasticity garch type models that feature level effects and multivariate normal and skewed distributions for stock indexes and their corresponding futures in the greater china region it is found that all else equal portfolios constructed using the multivariate skewed distribution are far more effective in hedging than those that rely on the other distributions and the effectiveness of hedged portfolios from the multivariate garch type models with level effects outperform those without level

optimal hedge ratios at the winnipeg commodity exchange multivariate garch models are employed to estimate time varying hedge ratios for three commodities traded on the winnipeg commodity exchange garch hedge ratios are shown to be superior to those based on the traditional regression approach to calculating the optimal hedge les ratios optimaux de comptant par rapport aux contrats a terme a la bourse de denrees de winnipeg l auteur emploie des modeles multivaries de type garch pour calibrer les ratios optimaux de comptant par rapport aux contrats a terme pour trois denrees transigees a la bourse des denrees de winnipeg ces ratios s averent superieurs a ceux qu on obtient par les methodes de regression traditionnelles

using business simulation games in regulatory impact analysis the case of policies aimed at reducing nitrogen leaching in the past regulatory impact analysis was predominantly based on the rational choice assumption of a completely informed and exclusively profit maximizing homo oeconomicus real economic actors however are multiple goal and boundedly rational decision makers an exclusive reliance on rational choice models therefore generates the risk that both the pace and the type of behavioural adaptations to changing institutional environments are misjudged against this background this article addresses three questions first can we use business simulation games as a convincing but low cost experimental tool for policy analysis second how do intentionally varied nitrogen extensification schemes impact the behaviour of students who participate in an explorative business simulation study third do nitrogen reduction policies that are framed as voluntary as opposed to prescriptive schemes have a different impact on behaviour even if they lead to the same profits respectively in our business simulation game th

interactions between agricultural and resource policy the importance of attitudes toward risk using a method proposed by meyer for deriving comparative statics results in the presence of risk this paper analyzes the effects of various agricultural and environmental policy alternatives on the choices of a risk averse producer with a just and pope production function many commonly held beliefs about policy effects are not supported unambiguously by economic theory for example a tax on pesticides will not necessarily reduce pesticide use or average output and a reduction in price of agricultural output will not necessarily lead to a reduction in use of water or agricultural chemicals

supply response under proportional profits taxation a striking result in the theory of the competitive firm under certainty is the proposition that a proportional profits tax with full offsets for losses will have no impact on optimal output this result does not apply under uncertainty it is shown that under constant or increasing returns to scale a proportional profits tax will yield an unambiguous expansion in output the same result is shown to hold for the more general rank dependent expected utility rdeu model

futures cross hedging with a stationary basis when managing risk frequently only imperfect hedging instruments are at hand we show how to optimally cross hedge risk when the spread between the hedging instrument and the risk is stationary for linear risk positions we derive explicit formulas for the hedge error and for nonlinear positions we show how to obtain numerically efficient estimates finally we demonstrate that even in cases with no clear cut decision concerning the stationarity of the spread it is better to allow for mean reversion of the spread rather than to neglect it

resource management under production and output price uncertainty implications for environmental policy various environmental policies have been proposed to control agricultural runoff of nutrients and pesticides the impacts of these policies on input use are complicated because of the various sources of uncertainty farmers face and the precise nature of farmers risk attitude a risk averse farmer s response to changed profit input and output taxes under output price and production uncertainty is examined the impact of these policies on input use depends on the form of production uncertainty risk input relationships risk attitudes and degrees of output price and production uncertainty these results have implications for the design and implementation of environmental and other production related policies copyright 2002 oxford university press

environmental regulation and the spatial structure of the u s dairy sector substantial public scrutiny about adverse environmental impacts of the dairy sector has resulted in increased environmental regulations a behavioral model of location and production is developed to examine the impacts of environmental regulations traditional location factors and agglomeration economies on the spatial structure and geographical location of dairy production the results show that counties in the states with more stringent environmental regulations tend to lose dairy inventories to those with less stringent policies there are substantially meaningful spatial patterns of dairy production current dairy production levels are positively correlated while changes in production levels are negatively correlated across counties

estimating the optimal hedge ratio in the presence of potential unknown structural breaks we propose a new approach in the estimation of the optimal hedge ratio that allows the hedge ratio to vary over time but without the necessity of frequently rebalancing the portfolio we apply this in the context of the us and uk equity markets using weekly spot share prices and future share prices during the period 5 january 1999 to 29 september 2009 our method is to test for cointegration in the presence of two potentially unknown structural breaks by determining the timing of each via the underlying data the empirical findings reveal that the spot and future prices are strongly cointegrated in each market the estimated parameters disclose that the optimal hedge ratio is not constant in case of the us and the uk we find one negative and one positive shift in the optimal hedge ratio in the us however we find only one significant and positive shift in the optimal hedge ratio in the uk the implication of these findings from the perspective of both investors as well as policy makers is elaborated on

stochastic technology risk preferences and adoption of site specific technologies a model of farmer decision making is developed to determine the extent to which uncertainties about soil fertility and weather affect the value of site specific technologies ssts using jointly estimated risk and technology parameters uncertainty can lead risk averse farmers to apply more fertilizers and generate more pollution than in the certainty case ignoring uncertainty and risk aversion would overestimate the economic and environmental benefits of ssts and underestimate the subsidy required to induce adoption accounting for uncertainties and risk preferences might explain the low observed adoption rates of ssts improving the accuracy of ssts would increase the incentives for adoption

what does the term structure tell us about future inflation abstract this empirical analysis indicates that for maturities of six months or less the term structure of nominal interest rates provides almost no information about the future path of inflation but does provide information about the term structure of real interest rates however as maturities lengthen to nine and twelve months the nominal term structure begins to contain information about future inflation but ceases to provide information about the real term structure these results are explained by differences in the relative variability of expected future inflation changes and real term structure slopes at different points in the term structure

the behaviour of the us consumer price index 1913 2003 a study of seasonality in the monthly us cpi this article analyses the seasonality in the monthly consumer price index cpi over the period january 1913 to december 2003 we examine three types of month effects if the mean of monthly cpi changes of the entire data set and of a given month were significantly different from zero if the mean of monthly cpi changes of a given month was different from the mean of the other months and if the variance of the monthly cpi changes for a given month was different from the variance of the other months the mean of monthly cpi changes for the entire data set 0 27 was found to be significantly greater than zero the means of monthly changes show a downward trend from september to december when the data are sliced into three sub periods we find an increasing trend in the means and medians of monthly changes but a decreasing trend in the sds of the monthly changes the mean of monthly cpi changes during the republican presidencies 0 15 was significantly lower than during the democratic presidencies 0

another look at models of the short term interest rate the short term rate of interest is fundamental to much of theoretical and empirical finance yet no consensus has emerged on the dynamics of its volatility we show that models which parameterize volatility only as a function of interest rate levels tend to over emphasize the sensitivity of volatility to levels and fail to model adequately the serial correlation in condi tional variances on the other hand serial correlation based models like garch models fail to capture adequately the relationship between interest rate levels and volatility we introduce and test a new class of models for the dynamics of short term interest rate volatility which allows volatility to depend on both interest rate levels and information shocks two important conclusions emerge first the sensitivity of interest rate volatility to interest rate levels has been overstated in the literature while this relationship is important adequately modeling volatility as a function of unexpected information shocks is also important sec ond we conclude that the volatility processes in many existing theoretical models of interest rates are misspecified and suggest new paths toward improving the theory

a utility based approach to energy hedging abstract a key issue in the estimation of energy hedges is the hedgers attitude towards risk which is encapsulated in the form of the hedgers utility function however the literature typically uses only one form of utility function such as the quadratic when estimating hedges this paper addresses this issue by estimating and applying energy market based risk aversion to commonly applied utility functions including log exponential and quadratic and we incorporate these in our hedging frameworks we find significant differences in the optimal hedge strategies based on the utility function chosen

managing economic risk in value based marketing of fed cattle this research investigates optimal price risk management strategies for fed cattle producers engaged in grid pricing stochastic simulation is used to determine optimal hedge ratios for fed cattle priced on a live weight basis or on a series of grids that vary in terms of premium discount structure as well as base price results indicate that the optimal hedging strategy is greatly affected by the base price used in a particular grid this has significant implications for pricing efficiency in the cattle market base prices that are linked more closely with downstream markets offer the potential to improve pricing efficiency however the risk associated with these prices is difficult to manage effectively with existing futures instruments

robust estimation and inflation forecasting this paper considers various models emerging from the fisher effect and or the term structure of interest rates for inflation forecasting this paper it is believed makes a contribution to the literature on estimation of the models by using a procedure that is robust for non normal errors improving the efficiency of the estimates considerably the consumer price index series 90 days and 180 days australian bank accepted bill rates covering the sample period 1968q1 to 1998q4 were used in this study contrary to earlier findings strong evidence was documented supporting the fisher effect in the presence of a structural break with the break point being at 1980q1 the overall results suggest that the error correction model of the fisher effect the term structure of interest rates and short run dynamics produce superior forecasts in particular when the models were estimated using the robust method these findings have important implications for economic policy analysis

interactions between agricultural and environmental policies a conceptual framework agricultural policy has a well documented impact on farmers production decisions and those decisions land water and agricultural chemical use may in turn affect the environment there is a public perception that existing agricultural policies are linked to agricultural pollution as exemplified by the conclusions of the recent national research council report alternative agriculture 1989 there is only limited theoretical or empirical research addressing these linkages however this paper develops a conceptual framework that can be used to analyze the interactions between agricultural and environmental policies and pollution this framework integrates physical and economic models at a disaggregate level necessary to capture the heterogeneity of the physical environment and the economic behavior of farmers following e hochman and d zilberman 1978 the disaggregate units can be statistically aggregated to a level useful for policy analysis agricultural and environmental policies can be categorized according to their effects on the intensive and extensive margins combining the different policy instruments with the microeconomic heterogeneity we find that existing agricultural and environmental policies can have either positive or negative effects of nonpoint source pollution to infer an aggregate effect requires data that do not currently exist our framework provides a basis for empirical investigations of these effects given adequate data moreover we find that agricultural policy instruments can be used to mitigate pollution if used appropriately