Speculation in the Oil Market

The run‐up in oil prices since 2004 coincided with growing investment in commodity markets and increased price co‐movement among different commodities. We assess whether speculation in the oil market played a role in driving this salient empirical pattern. We identify oil shocks from a large dataset using a dynamic factor model. This method is motivated by the fact that a small‐scale vector autoregression is not informationally sufficient to identify the shocks. The main results are as follows. (i) While global demand shocks account for the largest share of oil price fluctuations, speculative shocks are the second most important driver. (ii) The increase in oil prices over the last decade is mainly driven by the strength of global demand. However, speculation played a significant role in the oil price increase between 2004 and 2008 and its subsequent collapse. (iii) The co‐movement between oil prices and the prices of other commodities is mainly explained by global demand shocks. Our results support the view that the recent oil price increase is mainly driven by the strength of global demand but that the financialization process of commodity markets also played a role. Copyright © 2014 John Wiley & Sons, Ltd.     

Consumption smoothing,risk sharing and financial integration

Theories indicate that financial integration should allow economies to better share risk and thus improve consumption smoothing. We construct two widely used price‐based measures of financial integration (i.e., the standard correlation and the adjusted R‐squared) and test whether consumption volatility declines as international equity markets become more integrated. Pooled and panel estimates for three different groups of countries (i.e., G7, G20 and EU) provide no significant evidence of improved consumption smoothing as financial integration rises. This evidence is supported by a battery of robustness checks and holds over time. Taken together, our results suggest that convergence in international equity prices does not necessarily represent the channel through which risk‐sharing opportunities arise or consumption smoothing improves.     

VIX futures term structure and the expectations hypothesis

Tests of the expectations hypothesis reveal that the slope of the VIX futures term structure predicts the direction but not the magnitude of the evolution of the short-end of the curve, but predicts neither the direction nor the magnitude of short-term changes in the long-end of the curve. Relative value seeking spread trades, constructed to exploit such violations, deliver excess returns with annualized Sharpe ratios equal or greater than those of volatility-writing strategies deployed by VIX ETN's for a majority of the 32 spread trade combinations tested. I demonstrate that profits from beta-neutral variations of the spread trades, which are not compensation for taking on equity downside risk by design, are propagated by inflows of capital into VIX futures markets, after controlling for factors that measure changes in the availability of hedge fund capital, risk appetite, and momentum. At the heart of profits, and by extension the term structure anomalies, is a disproportionally elevated basis propagated by long VIX demand that enters the futures market through ETN channels.     

Investment opportunities and R&D investments in family and nonfamily firms

The firm’s investment opportunity set (IOS) reflects the prospective growth opportunities related to physical and human capital investments. IOSs are largely firm specific, embedded in assets-in-place, or generated by experience curves, learning-by-doing, and other similar phenomena. However, the value of an IOS can be destroyed if a firm does not exercise the option to invest. In this study, we theorize that a firm’s ability to invest in R&D is conditional on the availability of a favorable IOS. We test our theoretical propositions in the European business environment using a sample of large publicly traded firms with concentrated ownership. Our findings support the notion that the IOS is a significant determinant of corporate R&D investments, but the magnitude of this effect depends on the identity of the ultimate owner. Specifically, the sensitivity of R&D investments of family- and state-owned corporations is higher to favorable IOS than that of widely held corporations, suggesting these firms are more responsive to favorable IOS than others. By introducing the IOS dimension, our results have interesting implications for both theory and practice.     

Television-Induced Tourism: Evidence from Croatia

Atlantic Economic Journal - This paper analyzes the extent to which the filming of the popular television show Game of Thrones affected tourism in the Croatian city of Dubrovnik. Using monthly data...     

Arbitrage-free pricing of multi-person game claims in discrete time

We introduce a class of financial contracts involving several parties by extending the notion of a two-person game option to a contract in which an arbitrary number of parties is involved and each of them is allowed to make a wide array of decisions at any time, not restricted to simply exercising the option. The collection of decisions by all parties then determines the contract’s termination date as well as the terminal payoff for each party. We provide sufficient conditions under which a discrete-time multi-person game option has a unique arbitrage-free price, which is additive with respect to any partition of the contract. Our results are illustrated by the detailed study of a particular multi-person contract with puttable tranches.     

Fed funds futures variance futures

We develop a novel contract design, the fed funds futures (FFF) variance futures, which reflects the expected realized basis point variance of an underlying FFF rate. The valuation of short-term FFF variance futures is completely model-independent in a general setting that includes the cases where the underlying FFF rate exhibits jumps and where the realized variance is computed by sampling the FFF rate discretely. The valuation of longer-term FFF variance futures is subject to an approximation error which we quantify and show is negligible. We also provide an illustrative example of the practical valuation and use of the FFF variance futures contract.     

A comparison of alternative models for estimating firm’s growth rate

The growth rate plays an important role in determining a firm’s asset and equity values, nevertheless the basic assumptions of the growth rate estimation model are less well understood. In this paper, we demonstrate that the model makes strong assumptions regarding the financing mix of the firm. In addition, we discuss various methods to estimate firms’ growth rate, including arithmetic average method, geometric average method, compound-sum method, continuous regression method, discrete regression method, and inferred method. We demonstrate that the arithmetic average method is very sensitive to extreme observations, and the regression methods yield similar but somewhat smaller estimates of the growth rate compared to the compound-sum method. Interestingly, the ex-post forecast shows that arithmetic average method (compound-sum method) yields the best (worst) performance with respect to estimating firm’s future dividend growth rate. Firm characteristics, like size, book-to-market ratio, and systematic risk, have significant influence on the forecast errors of dividend and sales growth rate estimation.