Testing the martingale difference hypothesis in CO2 emission allowances

This study examines the martingale difference hypothesis (MDH) for the carbon emission allowance market within the European Union Emission Trading Scheme (EU ETS) during the Phase I and the Phase II, using both daily and weekly data over the 2005–2009 period. We analyze the MDH for spot prices negotiated on BlueNext, European Energy Exchange and Nord Pool along with futures prices negotiated on BlueNext and European Climate Exchange, using the new variance ratio tests developed by Kim (2009) and the generalized spectral test proposed by Escanciano and Velasco (2006). For the Phase I, the results show that the spot price changes of these three markets are predictable, suggesting the possibility of abnormal returns through speculation, except during the period April 2006 to October 2006, namely after the compliance break and before the ECs of stricter NAP II. Finally, we find that the CO₂ spot and futures price changes are unpredictable during the Phase II because we failed to reject the MDH based on both daily and weekly data. Thus, these markets are found to be weak-form efficient.     

Option value of emission allowances

We study the market for emission allowances stipulated in the 1990 Clean Air Act Amendment. We assume that the number of allowances is fixed and that demand is affected by a stochastic parameter that follows a Wiener process (Brownian motion). The optimal investment policy for scrubbers is characterized. Investments in scrubbers are reduced if there is greater uncertainty about future market conditions. This is because purchases of emission allowances provide flexibility to adapt to demand conditions in a way that installing scrubbers does not. The price of emission allowances may therefore exceed the marginal cost of scrubbers by an amount called the option value. We derive an explicit formula for the option value and present computational results to illustrate its likely magnitude.     

On the design of optimal grandfathering schemes for emission allowances

This paper derives optimal schemes for the free allocation of emission allowances in a dynamic context. We consider emissions- and output-based allocation rules which allow for updating of the basis of allocation over time and thereby do not rely on historical data only. We show that such dynamic schemes do not necessarily induce inefficient outcomes. In closed trading systems with an absolute cap on emissions, grandfathering schemes which allocate allowances proportionally to past emissions are first-best. However, in open trading systems where allowances can be traded with outsiders, first-best allocation schemes must not depend on firm-specific decisions while second-best schemes correspond to a Ramsey rule of optimal tax differentiation and are generally based on both past emission and output levels.     

Out-of-equilibrium price dynamics

A trading-post organization of exchange is shown to determine an out-of-equilibrium price dynamics. The unique equilibrium of quasi-linear economies (defined by log-linear utility functions) is stable for the discrete time version of the dynamics. Equilibria that are stable for the continuous time version include those that satisfy the gross-substitutability property, the no-trade equilibria and, more generally, those for which trade intensity is relatively small. In addition, the set of stable equilibria is path-connected when endowments are allowed to vary without sign restrictions.      

Strategic partitioning of emission allowances under the EU Emission Trading Scheme

The EU Emission Trading Scheme (ETS) is breaking new ground in the experience with emission trading regimes across multiple jurisdictions. Since the EU ETS covers only some industries, it implies a hybrid emission control scheme where EU member states must apply complementary domestic emissions regulation for the non-trading sectors of their economies in order to comply with their national emission reduction targets. The EU ETS thus opens up for strategic partitioning of national emissions budgets by the member states between trading and non-trading sectors. In this paper we examine the potential effects of such strategic behavior on compliance cost and emissions prices. We show that concerns on efficiency losses from strategic partitioning are misplaced. In turn, our analysis implicitly indicates significant political economy forces behind EU climate policy, as both cost-effective and strategically motivated partitioning of national emission budgets are far off from the actual break-down between trading and non-trading sectors.     

Futures markets,private storage,and price stabilization

This paper considers several issues pertaining to the role of an efficient futures market for price stabilization. The main aspect which is emphasized is the provision of information by such a market. It provides efficient forecasts which facilitates both production and storage decisions, as a result of which the stability of spot prices is generally increased. The allocation of the benefits from a futures market to the various groups in the economy is discussed andthe present results related to those of the more traditional buffer stock literature. Finally, the degree of stability provided by a futures market is compared with that obtained by active market intervention by a stabilization authority.     

Index decomposition analysis applied to CO2 emission studies

Index decomposition analysis (IDA) was first extended from energy consumption to energy-related CO₂ emission studies in 1991. Since then many studies have been reported covering various countries and emission sectors. However, unlike the case of energy consumption studies, a comprehensive literature survey that focuses specifically on emission studies has so far not been reported. In this paper, we attempt to fill this gap by reviewing 80 papers appearing in peer-reviewed journals from 1991 to 2012 in this application area. The first part of this paper deals with the developments with regard to the IDA approaches used by researchers, and the scope and focus of their studies. In the second part, the empirical results reported in the surveyed studies are analyzed, consolidated, and presented by emission sector. The objective is to reveal the relative contributions of key effects on changes in the aggregate carbon intensity, and this is done by emission sector and by country. The findings of both parts are useful in understanding the development of IDA in the application area of emission study, as well as the key drivers of aggregate carbon intensities in the past and their possible future developments.     

Futures markets,price stabilization and efficient exploitation of exhaustible resources

Markets for natural resource futures contracts and cash forward contracts experience a rapid growth. According to theory, this should result in more efficient resource depletion, implying that price formation is more consistent with Hotelling's rule. The rationale of this stabilization effect is briefly discussed. Next, we analyze the impact of expanding futures markets on the behaviour of individual resource owners trading on the cash market. Using a simple pulse extraction model, we demonstrate that the expected time of depletion can shift to the present or the future, and that utility of exploitation can go up or down, as market prices are stabilized.     

Disequilibrium dynamics with monetarist price expectations

In this note we sketch the main features of the dynamic evolution of a rationed equilibrium macroeconomic model in which prices and wages respond to excess demands and inflation expectations, and the money stock is endogenous. We postulate monetarist inflation expectations, i.e., expected inflation is assumed to be equal to the current percentage rate of change of the money stock. If the system is stable, monetarist inflation expectations are asymptotically rational.     

基于可获供给的资产价格动态

通过引入疏忽投资者,本文初步探讨可获资产供给引起的价格波动,对比经典资产价格理论,结果显示市场积极参与度及入场时机引发的交易廷迟都将导致价格波动,而具有更高流动性的市场,其产品供给更丰富,价格也相对更低。     

Futures basis,inventory and commodity price volatility: An empirical analysis

We employ a large dataset of physical inventory data on 21 different commodities for the period 1993–2011 to empirically analyze the behavior of commodity prices and their volatility as predicted by the theory of storage. We examine two main issues. First, we analyze the relationship between inventory and the shape of the forward curve. Low (high) inventory is associated with forward curves in backwardation (contango), as the theory of storage predicts. Second, we show that price volatility is a decreasing function of inventory for the majority of commodities in our sample. This effect is more pronounced in backwardated markets. Our findings are robust with respect to alternative inventory measures and over the recent commodity price boom.     

Consequences of irreversibilities on optimal intertemporal CO2 emission policies under uncertainty

This paper investigates how irreversibilities affect the optimal intertemporal accumulation of greenhouse gases in the atmosphere under uncertainty. More precisely, the evolution of the future temperature is assumed to follow an Itô-process with the drift provided by greenhouse gas emissions. This paper considers two different kinds of irreversibilities: of emissions (i.e., CO₂ once dissolved into the air cannot be collected later) and of stopping. These issues are investigated first (in the tradition of the real option literature) as pure stopping problems and then allowing for a continuous choice of emissions. Implications for global warming are: an irreversible stopping of greenhouse gas emissions is never optimal in a continuous framework and yields in the real option framework a less conservationist stopping rule in which uncertainty increases the stopping threshold (i.e. works against conservation).     

Financial liberalization and short-run housing price dynamics

We develop a continuous time, rational expectations, multi-cohort model of an exchange economy with housing, the purchase of which is subject to a down payment (DP) constraint. The timing of the house purchase decision is a crucial endogenous variable, and four determinants of it are identified – the housing services effect, the interest discounting effect, the consumption smoothing effect, and the rate of price increase effect. Cohort effects, and supply constraints, play crucial roles at the aggregative level. We explore in detail the effects of a discrete financial liberalization, and show that if the liberalization is not announced sufficiently far in advance, housing prices will initially overshoot the new stationary equilibrium, and vice versa. Particular attention is paid to the possibility that for a subset of cohorts along the transition path the DP constraint will not bind. An interesting ‘Prisoners’ Dilemma’ is also identified, and policy implications discussedJEL Classification Numbers: E3, R21Valuable comments and suggestions from Phillip Brock, Ho Kong-Weng, Liu Haoming, David McKenzie, David Miles, Jacques Olivier, Phang Sock-Yong, J. Thampapillai, Ping Wang, Wong Wing-Keung, and Zeng Jinli are gratefully acknowledged. I am also immensely indebted to an anonymous referee, whose incisive, deep and patient comments, on successive drafts, helped greatly to sharpen and improve the paper, as well as to the Editor and the Co-Editor, Professor Mordecai Kurz, for their invaluable advice and encouragement. An earlier version was presented at a Conference in Honour of Ronald McKinnon, held at Stanford University in June 2002     

Climate game analyses for CO2 emission trading among various world organizations

This paper simulates the saving in terms of the total abatement cost of CO₂ emission reductions for different trading games reflecting the potential cooperation among organizations including the European Union (EU), the Asia-Pacific Economic Cooperation (APEC) countries, the Union of South American Nations (USAN), and the Indian Ocean Rim Association for Regional Cooperation (IOR-ARC). A game approach is conducted to determine if the cooperation will come into existence among the organizations stated above. A similar idea is applied to the four largest emission countries, China, the United States, Russia, and India, as four individual players in the trading game.Joining the market is the strictly dominant strategy for any organization from the results. The Nash equilibrium shows that, regardless of the organizations that have already existed in the market, joining the market is always the best policy for the remaining organizations which are currently not in the market. Similarly, India likes the organization to which it belongs, i.e. IOR-ARC, to trade with the EU and APEC, and the U.S. wants the organization to which it belongs, i.e., APEC, to cooperate with the organizations USAN and IOR-ARC. However, China and Russia prefer trading with other countries within their own organizations.     

House price dynamics: Evidence from Beijing

To study the house price dynamics in China, this paper extends the traditional life-cycle model by incorporating land supply, regime shifts and government regulation factors. The models are estimated with an error correction framework using quarterly data from 2000 to 2007 in Beijing. The conclusions are as follows. (1) There exits a stable co-integration relationship between house price and fundamentals; land supply and financial regimes are also important determinants of long-run equilibrium house prices. (2) Short-run dynamics depend on changes of fundamentals and the adjustment process of housing market. Land supply has a significant impact on house price fluctuations while demand factors such as user costs, income and residential mortgage loan have greater influences. The adjustment speed of real house prices to the long-run equilibrium has been reduced significantly since 2005 which means exogenous shocks can cause prolonged deviation of real house prices from the equilibrium level.     

Industry structure and the dynamics of price adjustment

Using annual US data for gross domestic product originating by sector between 1947 and 1997 it is shown that a negative long-run relationship between inflation and the markup is present across the sectors as well as in the aggregate data. A preliminary explanation based on industry structure is explored for the relative sizes of the impact of inflation on the markup in the long-run for the various sectors.     

Bayesian analysis of Hong Kong's housing price dynamics

This paper uses a Bayesian vector‐autoregressive model with sign restrictions to estimate the underlying drivers of Hong Kong's housing price dynamics in the short run. While existing studies are useful in analysing housing valuation, little attention has been paid to the short‐run dynamics. In contrast, the present paper identifies short‐run drivers of housing prices using structural identification with theoretical underpinnings. We find that among the shocks that we have identified, bank lending shock and housing supply shock were the main factors affecting Hong Kong's housing prices. Low mortgage rates were another key factor that led to the significant increase in housing prices after the global financial crisis.     

Uncertainty and the comparative dynamics of stock price

This article derives an envelope theorem for dynamic economic problems under conditions of uncertainty. The theorem is motivated through analysis of a firm with an objective of maximizing shareholders' wealth. Envelope results are used to determine how the value of the optimizing firm is expected to change in response to shifts in several variables including the risk-free interest rate, the market risk premium, the tax rate, and the prices of output and inputs. Uncertainty is introduced into the model using a general measure-theoretic approach which does not require restrictive assumptions regarding the behavior of the problem's stochastic variables.     

An econometric analysis of the effects of market liberalization on price dynamics and price volatility

The paper investigates price dynamics under market liberalization, with a focus on the effects of lowering price floors. We analyze price dynamics by specifying and estimating a dynamic Tobit model under time-varying volatility, where the market price is censored by a government-set support price. The model is applied to the U.S. butter market over the last three decades. The econometric results show how the price support program affects both expected prices and the volatility of prices. It is found that the censoring effects of a price support program can be significant and large even if the price support is set relatively low.

Implicit transaction cost management using intraday price dynamics

Using the Exchange Liquidity Measure, we show that implicit transaction costs exhibit intraday regularities around specific price change signals for a sample of European blue chips publicly quoted on Euronext. Not only transaction costs follow a reverse J-shape throughout the day but they also decrease significantly around specific patterns of price dynamics. By focusing on these signals during the trading day, liquidity traders may detect intraday windows of opportunities during which implicit transaction costs are lower.