Pricing Weather Derivatives Using the Indifference Pricing Approach

Abstract

This paper adopts an incomplete market pricing model–the indifference pricing approach–to analyze valuation of weather derivatives and the viability of the weather derivatives market in a hedging context. It incorporates price risk, weather/quantity risk, and other risks in the financial market. In a mean-variance framework, the relationship between the actuarial price and the indifference price of weather derivatives is analyzed, and conditions are obtained concerning when the actuarial price does not provide an appropriate valuation for weather derivatives. Conditions for the viability of the weather derivatives market are examined. This paper also analyzes the effects of partial hedging, natural hedges, basis risk, quantity risk, and price risk on investors’ indifference prices by examining the distributional impacts of the stochastic variables involved.     

Assessing the Time-Varying Interest Rate Sensitivity of Real Estate Securities

Abstract

This paper examines the sensitivity of real estate securities to changes in both market and central bank interest rates. It is commonly viewed that the traded real estate market is one of the industry sectors most susceptible to interest rate movements. This is due to traditional high levels of borrowing, the impact of rate changes on property yields and indirectly upon occupational demand and thus rental income. The results which are the first to examine the UK sector, highlight the impact of interest rates on UK property companies, in relation to both returns and volatility. The paper also illustrates that this sensitivity is not confined to periods of high and volatile interest rates as the sample period under examination is characterized by historically low and stable rates.     

Parasoziale Meinungsführerschaft

In a democratic society, the media operate as a public space in which political and social topics are discussed. As media communicators influence and restrict both the topics of discussion and the amount of information available from in the media, they exert a substantial influence on the recipients’ formation of political opinion. The present study examines this impact by integrating the theoretical concepts of opinion leadership and parasocial relationship, resulting in a phenomenon referred to as parasocial opinion leadership. Based on the results of a qualitative survey of recipients, the concept was then substantiated. Parasocial opinion leadership is based on viewer’s perceptions and comes into existence, if (1) a recipient ascribes certain attributes to a media communicator based on a parasocial relationship; which (2) allows for a gradual influence of the media personality on the recipient’s opinions and attitudes by fulfilling at least one of the three functions information and reduction of complexity, orientation or arousal of interest.     

Disorganization in the process of transition Firm-level evidence from Ukraine

Most post-communist economies are characterized by an initial collapse in aggregate output. Blanchard and Kremer (1997) and Roland and Verdier (1997) have recently modelled supply-side distortions – disorganization in the links of production – that can lead to a short-term output contraction after market liberalization and a recovery thereafter. This paper is the first to illustrate and test the effects of disorganization in the transition process by using a unique dataset of 300 Ukrainian firms. Our results show that for firms that existed under central planning, disorganization constrains employment and productivity growth during the transition process to a market economy. We also show that the effects of disorganization are greater the more out-dated the capital stock inheritance from the planning system. In contrast, disorganization plays no role in the determination of employment and productivity growth in newly established private firms.
JEL classification: P0, O0, D0.     

Why is it so difficult? Trade liberalization under the Doha Agenda

Many explanations have been offered for the current difficultiesof the World Trade Organization (WTO). In fact, the system appearsto have managed many of these challenges reasonably well, includingthe increase in the number of members, its ‘mediaeval’decision-making procedures, the changing geopolitical environment,the rapid growth of preferential trade arrangements (PTAs),the complexity of its agreements, and concerns about erosionof unilateral preferences. By contrast, the near-exhaustionof the traditional fuel of industrial-country non-agriculturaltariffs, the increasing importance of non-trade concerns, andincomplete adjustment to a new, multi-polar negotiating systemappear to be important factors requiring further examination.     

An Economic Evaluation of Model Risk in Long‐term Asset Allocations

Following the recent crisis and the revealed weakness of risk management practices, regulators of developed markets have recommended that financial institutions assess model risk. Standard risk measures, such as the value‐at‐risk (VaR), emerged during the 1990s as the industry standard for risk management and become today a key tool for asset allocation. This paper illustrates and estimates model risk, and focuses on the evaluation of its impact on optimal portfolios at various time horizons. Based on a long sample of US data, the paper finds a non‐linear relation between VaR model errors and the horizon that impacts optimal asset allocations.     

Sample size and the Binomial CUSUM Control Chart: the case of 100% inspection

The Binomial CUSUM is used to monitor the fraction defective (p) of a repetitive process, particularly for detecting small to moderate shifts. The number of defectives from each sample is used to update the monitoring CUSUM. When 100% inspection is in progress, the question arises as to how many sequential observations should be grouped together in forming successive samples. The tabular form of the CUSUM has three parameters: the sample size n, the reference value k, and the decision interval h, and these parameters are usually chosen using statistical or economic-statistical criteria, which are based on Average Run Length (ARL). Unlike earlier studies, this investigation uses steady-state ARL rather than zero-state ARL, and the occurrence of the shift can be anywhere within a sample. The principal finding is that there is a significant gain in the performance of the CUSUM when the sample size (n) is set at one, and this CUSUM might be termed the Bernoulli CUSUM. The advantage of using n=1 is greater for larger shifts and for smaller values of in-control ARL. First version: September 1998/Third revision: September 2000