Convenience yield and the theory of storage: applying an option‐based approach

We propose that an options‐based approach is a superior alternative to the traditional cost‐of‐carry method to model both the behaviour of convenience yields and the commodity price responses to changes in inventory levels. This approach is shown to be more robust and avoids the simplifying assumptions embedded in cost‐of‐carry valuation which fully accounts for the non‐negativity constraint on inventory. Unlike the cost‐of‐carry approach, the options‐based approach does not treat the convenience yield as an exogenous factor. This offers a more natural measure of implied convenience yields in commodity trading strategies. We test the relationship between convenience yields and inventory levels for a number of liquidly traded base metals using both methods. Our results show that the relationship between convenience yields and inventory levels is strongly defined under the options‐based approach in line with market beliefs. This result is consistent with other studies that have used the options‐based approach in other nonmetals commodity markets.     

The cost of agricultural production risk

We examine the relative influence of preferences and technology on producers' ex ante willingness to pay for a reduction in production risk. A risk averse producer pays both an Arrow-Pratt risk premium to stabilize income and a ‘production premium’ to stabilize yield. Using soil-nitrate risks as our motivating example, we demonstrate that the production premium accounts for 40-85% of producers' willingness to pay for risk reduction. These results demonstrate the relative importance of technology over risk preferences when estimating the costs of agricultural production risk.     

An experimental approach to valuing new differentiated products

An experimental store was created to evaluate initial demand for locally produced and guaranteed tender steak products as a more realistic alternative to contingent valuation (CV) and dichotomous-choice experimental methods. Strengths of the approach are incentive compatibility, a realistic consumption set, and a familiar choice environment. Consumers selected among USDA Choice, premium quality, lean, guaranteed tender and locaily produced strip steaks. A double-hurdle count data model indicated initial willingness-to-pay (WTP) for locally produced steak comparable to prior CV results, but demand was highly elastic. Demand for premium quality steak crowded out demand for the guaranteed tender product, contrasting with prior dichotomous-choice experimental results.     

Empirical likelihood block bootstrapping

Monte Carlo evidence has made it clear that asymptotic tests based on generalized method of moments (GMM) estimation have disappointing size. The problem is exacerbated when the moment conditions are serially correlated. Several block bootstrap techniques have been proposed to correct the problem, including Hall and Horowitz (1996) and Inoue and Shintani (2006). We propose an empirical likelihood block bootstrap procedure to improve inference where models are characterized by nonlinear moment conditions that are serially correlated of possibly infinite order. Combining the ideas of Kitamura (1997) and Brown and Newey (2002), the parameters of a model are initially estimated by GMM which are then used to compute the empirical likelihood probability weights of the blocks of moment conditions. The probability weights serve as the multinomial distribution used in resampling. The first-order asymptotic validity of the proposed procedure is proven, and a series of Monte Carlo experiments show it may improve test sizes over conventional block bootstrapping.     

The relation of criminal activity to black youth employment

This article reports on a study which attempts to estimate the extent to which current and previous criminal activity reduces the employment of inner city black male youths from high poverty neighborhoods. The study finds a significant trade-off between employment and crime, with crime associated with a 10 to 12 percent reduction in employment of these youths. The policy implication is that increased criminal deterrence, as well as other programs, has a role to play in efforts to resolve the employment crisis for disadvantaged youths.     

How does financial performance affect marketing? Studying the marketing-finance relationship from a dynamic perspective

In this article, the authors provide a dynamic framework for understanding the relationship between marketing and financial performance. They suggest that firms market to financial markets as well as to consumption markets and that some mixture provides superior long-term performance. The authors discuss the potential pitfalls of overemphasizing one market to the detriment of another and then provide a theoretical model of the factors that influence the extent of marketing to financial markets. This is followed by a discussion of implications for theory, practice, and future research. Mitchell J. Lovett (mitchell.lovett@duke.edu) is a Ph.D. student in the Fuqua School of Business at Duke University. His current research interests include consumer and seller learning in dynamic environments, competitive and dynamic marketing strategies, and the role of marketing in innovation. Jason B. MacDonald (jmacdona@boisestate.edu) is an associate professor of marketing in the College of Business and Economics at Boise State University. His current research interests include the role of marketing in investor relations and Internet marketing strategy.     

Calculating Trade Damages in the Context of the World Trade Organization's Dispute Settlement Process

Since its inception in 1995, the World Trade Organization (WTO) dispute settlement system has received over 250 notifications of trade disputes. While most have been settled, in a few cases the WTO arbitrators had to approve damage awards. This paper will use one of these cases ( Hormones ) to explain the methodology arbitrators use to calculate damages and how this methodology differs from an efficiency-based measure of welfare that economists would instinctively provide. Yet, there are rational reasons for this difference and the arbitrator's methodology does a better job of providing incentives for countries not to violate trade agreements.     

Equity,efficiency, and discounting : The reasons for discounting intergenerational effects

Confusion between the ethical norm of intergenerational equity and the practical technique of discounting only obscures the basic issues of efficiency and equity. The author distinguishes between the discounting approach and the equity argument, and explains their essentially complementary roles in long-term investment decisions. He argues that the discounting method is an important tool in the achievement of intergenerational equity since it can determine the amount of compensation to be paid to future generations, a sum which by definition will compensate them for the damage our action has caused.