Balancing Power Markets in Germany: Timing Matters

This paper analyzes timing issues on the German balancing power market. We focus the analysis on the length of the bidding period, i.e. the length of the time period a supplier has to provide balancing power capacities, and the question of how far before the beginning of a bidding period the auction should be carried out. We show that different load levels require different plants for the optimal provision of balancing power. In a longer bidding period, the power plants that have the lowest average cost in the bidding period are unlikely to be efficient in all hours of the bidding period. Hence, shortening bidding periods can increase efficiency. Furthermore, we show that an early commitment on a power plant’s mode of operation (when uncertainty about resulting spot prices is still relatively high) also reduces efficiency. This suggests that the auction should be held relatively close to the beginning of the bidding period. Furthermore, we discuss some advantages of a liquid real time market.     

Forecasting the Yen/U.S. Dollar exchange rate: Empirical evidence from a capital enhanced relative PPP-based model

This study uses a relative purchasing power parity (PPP) model based on price indexes (consumer, CPI or traded-goods price indexes, TPI), interest rate differentials, and a linear forecasting technique to determine the horizon over which such a model outperforms a random walk in forecasting the Yen/U.S. Dollar exchange rates out-of-sample. The results improve if one adjusts a simple CPI-based PPP-model by interest rate differentials, while the best results are obtained using a TPI-based PPP-model. For example, the TPI-based model, adjusted by interest rate differentials, is able to statistically significantly outperform the pure random walk starting at forecast horizons of 1 month.     

Simulation-based pricing of convertible bonds

We propose and empirically investigate a pricing model for convertible bonds based on Monte Carlo simulation. The method uses parametric representations of the early exercise decisions and consists of two stages. Pricing convertible bonds with the proposed Monte Carlo approach allows us to better capture both the dynamics of the underlying state variables and the rich set of real-world convertible bond specifications. Furthermore, using the simulation model proposed, we present an empirical pricing study of the US market, using 32 convertible bonds and 69 months of daily market prices. Our results do not confirm the evidence of previous studies that market prices of convertible bonds are on average lower than prices generated by a theoretical model. Similarly, our study is not supportive of a strong positive relationship between moneyness and mean pricing error, as argued in the literature.     

Monetary stabilization in countries in transition

The best way to prevent hyperinflation when domestic prices are liberalized is to initiate the transition from a planned economy to a market economy with a currency reform. In the following period, moderate inflation and flexible exchange rates are suitable to facilitate relative price adjustments. Only after the bulk of alignments has been accomplished can a switch in the exchange rate regime be convenient. The nominal peg of a stable reference currency lowers the level and the variance of domestic inflation rates. The credibility of an exchange rate target may best be achieved by combining a currency board (objective sustainability) with a crawling peg (political sustainability). Price stability can be realized in the long run by reducing the annual depreciation rate in regular, preannounced steps.     

Issues affecting the development of an international accounting standard on financial instruments

While the global convergence of accounting standards is making steady progress, certain issues stand out as challenges. A major area where an international accounting standard has not gained universal acceptance is that of financial instruments. The European Union's refusal to adopt all of International Accounting Standard (IAS) 39, Financial Instruments: Recognition and Measurement, highlights that fact. The International Accounting Standards Board continues to address financial instruments in efforts to remedy this situation. Thus, it is important to better understand issues affecting the development of an international financial instruments accounting standard. The purpose of this study is to find out what issues are important to respondents in their comment letters regarding the Financial Instruments Discussion Paper (FIDP), and whether stakeholder groups differ in positions and the reasons given to support their views. The FIDP represented a major step toward approval of IAS 39 and proposed fair value accounting for all financial instruments. Over 1500 pages of comment letters were generated by the 168 respondents, who represented over 20 countries and several different stakeholder groups. While most respondents disagreed with the FIDP, differences in support and the specific issues used to support those positions were found by stakeholder interest group (accounting profession, regulators, standard-setters, financial analysts, and preparers) and by stakeholder nationality.     

A simple macro model of Original Sin based on optimal price setting under incomplete information

This paper analyses the consequences of “original sin” (the fact that the currency of an emerging market economy usually cannot be used to borrow abroad) for macroeconomic stability. The approach is based on third-generation models of currency crises, but differs from alternative versions by explicitly modeling the price setting behavior of firms if prices are sticky and there is incomplete information about the future exchange rate. It is shown that a small depreciation is beneficial, but a large one is detrimental.     

Cost-effectiveness analysis of sequential biologic therapy with ixekizumab versus secukinumab as first-line treatment of moderate-to-severe psoriasis in the UK

Aims: Patients with psoriasis often undergo treatment with a sequence of biologic agents because of poor/loss of response to initial therapy. With the availability of newer agents like ixekizumab and secukinumab, there is a need for cost-effectiveness analyses to better reflect current clinical practice. This study aimed to assess the cost-effectiveness of a sequence of biologic therapies containing first-line ixekizumab vs first-line secukinumab in patients with moderate-to-severe plaque psoriasis in the UK.

Materials and methods: A Markov model with a lifetime horizon was developed to compare the cost-effectiveness of ixekizumab and secukinumab treatment sequences: ixekizumab → ustekinumab → infliximab → best supportive care (BSC) vs secukinumab → ustekinumab → infliximab → BSC. The model used monthly cycles, and included four health states: trial period, treatment maintenance, BSC, and death. At the end of the trial period, responders transitioned to maintenance therapy; non-responders transitioned to the next biologic in the sequence. An annual discontinuation rate of 20% was assumed for maintenance therapy.

Results: The ixekizumab sequence provided cost savings of £898 (£176,203 vs 177,101) [year 2015 values] and gained 0.03 more quality-adjusted life-years (QALYs: 1.45 vs 1.42) vs the secukinumab sequence over the lifetime horizon. Probabilistic sensitivity analysis showed an 89.8% likelihood that the ixekizumab sequence would be cost-effective at a threshold of £20,000 per QALY gained.

Limitations: The analysis used list prices for drugs rather than confidential, preferentially priced Patient Access Scheme costs. In addition, efficacy input data were based on a network meta-analysis, as there were no head-to-head trials comparing ixekizumab and secukinumab.

Conclusion: First-line treatment with ixekizumab as part of a specific sequential biologic therapy for moderate-to-severe plaque psoriasis in the UK provided slight advantages in cost savings and QALYs gained over a similar treatment sequence initiated with secukinumab. In view of the small magnitude of these differences, factors such as patient preferences (e.g. for number of injections) and long-term safety (e.g. related to time on the market) may also be important for clinical decision-making.     

Why (not) cooperate? A cognitive model of farmers’ intention to join producer groups in Romania

After the breakdown of the communist regime in Romania, collective farms were replaced by a large number of small-scale private farms. Although cooperation seems to be a favourable choice for these smallholders, it did not develop as perhaps expected. This article explores the factors that determine the formation of the intention of Romanian vegetable farmers to join marketing cooperatives in the form of so called producer groups. Our theoretical framework refers to Ajzen’s Theory of Planned Behaviour, which we model with a structural equation model. We identified as main intention drivers the expectation for better prices and easier access to capital. Perceived family support is another significant factor. The level of distrust is high. Although our trust variable is not significant as a predictor of the intention to cooperate in the model, we find qualitative indications that trust plays a role when the intention is translated into actual behaviour.     

The role of global financial conditions for credit supply in EMU periphery countries

The article analyses the role of global financial conditions for credit supply and growth performance in individual member states of the European Monetary Union (EMU). In line with the risk-taking channel of monetary policy, we find that in the short run, the Fed and European Central Bank (ECB) interest rate policy compensate for changes in global risk assessment thereby supporting net private credit flows to the European periphery. However, in later periods, a worsened risk sentiment weighs on credit flows to these countries. In contrast, EMU core countries are generally less affected by global financial shocks. This asymmetric influence of global conditions on EMU member states are smoothed by the uniform access of commercial banks to the Eurosystem’s open market operations in conjunction with the redistribution of liquidity via the TARGET mechanism.