Liquidity commonality in commodities

We examine liquidity commonality in commodity futures markets. Using data from 16 agricultural, energy, industrial metal, precious metal, and livestock commodities, we show there is a strong systematic liquidity factor in commodities. Liquidity commonality was present in 1997–2003 when commodity prices were relatively stable and during the recent boom. There is some support for both “supply-side” and “demand-side” explanations for this commonality. We find no evidence of a consistent link between stock and commodity liquidity in general. Energy commodities appear to provide a better hedge against equity market liquidity risk than the other commodity families.     

The cross-sectional relation between conditional heteroskedasticity,the implied volatility smile,and the variance risk premium

This paper estimates how the shape of the implied volatility smile and the size of the variance risk premium relate to parameters of GARCH-type time-series models measuring how conditional volatility responds to return shocks. Markets in which return shocks lead to large increases in conditional volatility tend to have larger variance risk premia than markets in which the impact on conditional volatility is slight. Markets in which negative (positive) return shocks lead to larger increases in future volatility than positive (negative) return shocks tend to have downward (upward) sloping implied volatility smiles. Also, differences in how volatility responds to return shocks as measured by GARCH-type models explain much, but not all, of the variations in excess kurtosis and multi-period skewness across different markets.     

ETF arbitrage: Intraday evidence

We use two extremely liquid S&P 500 ETFs to analyze the prevailing trading conditions when mispricing allowing arbitrage opportunities is created. While these ETFs are not perfect substitutes, our correlation and error correction results suggest investors view them as close substitutes. Spreads increase just before arbitrage opportunities, consistent with a decrease in liquidity. Order imbalance increases as markets become more one-sided and spread changes become more volatile which suggests an increase in liquidity risk. The price deviations are followed by a tendency to quickly correct back towards parity.     

Consistent risk management: Three models outlined

This article introduces three models on how to understand the demand for consistent risk management. The first model, which accords with traditional risk analysis, is called the Standard Model. In this model, the decisive criterion of whether or not to accept a risk is if the total benefit exceeds the total cost. Since this model cannot protect the individual from unfair risk exposure two more models are outlined. The arguments in the Model of Inviolable Rights and in the Model of Procedural Justice evolve around the separateness of individuals, rights and fair risk taking. It is argued that risk management needs to acknowledge a variety of morally salient factors to avoid exposing people unfairly to risks.     

Imaginable surprise in global change science

Decisionmakers at all scales (individuals, firms, and local, national, and international governmental organizations) are concerned about reducing their vulnerability to (or the likelihood of) unexpected events, 'surprises.' After briefly and selectively reviewing the literature on uncertainty and surprise, we adopt a definition of 'surprise' that does not include the strict requirement that it apply to a wholly unexpected outcome, but rather recognizes that many events are often anticipated by some, even if not most observers. Thus, we define 'imaginable surprise' as events or processes that depart from the expectations of some definable community. Therefore, what gets labelled as 'surprise' depends on the extent to which what happens departs from community expectations and on the salience of the problem. We offer a typology of surprise that distinguishes imaginable surprises from risk and uncertainty, and develops several kinds of impediments to overcoming ignorances. These range from the need for more 'normal science' to phenomenological impediments (e.g., inherentunpredictability in some chaotic systems) to epistemological ignorance (e.g., ideological blocks to reducing ignorance). Based on the input of some two dozen scholars at an Aspen Global Change Institute Summer Workshop in 1994 *, we construct two tables in which participants offer many possible 'imaginable surprises' in the global change context, as well as their potential salience for creating unexpectedly high or low carbon dioxide emissions. Improving the anticipation of surprises is an interdisciplinary enterprise that should offer a sceptical welcoming of outlier ideas and methods.     

Benchmarking Risk Management Within the International Water Utility Sector. Part I: Design of a Capability Maturity Methodology

Risk management in the water utility sector is becoming increasingly explicit. However, due to the novelty and complexity of the discipline, utilities are encountering difficulties in defining and institutionalising their risk management processes. In response, the authors have developed a sector specific capability maturity methodology for benchmarking and improving risk management. The research, conducted in consultation with water utility practitioners, has distilled risk management into a coherent, process‐based framework. We identified eleven risk management processes, and eight key attributes with characterise the extent to which these processes are defined, controlled and institutionalised. Implementation of the model should enable utilities to more effectively employ their portfolio of risk analysis techniques for optimal, credible and defensible decision making.     

Literatur

1. A simplified method for the deduction of Sheppard's correction formulae for ordinary and factorial moments, and for semi-invariants, together with more general results than those previously known, especially with regard to the remainder term, has recently been given ¹ H. Wold: Sulla correzione di Sheppard. Giornale dell' Istituto Italiano degli Attuari IV 1934, pp. 304–314. The methods used in the note referred to are similar to those used by W. F. Sheppard in his paper “The Calculation of Moments of a Frequency Distribution”, Biometrika V 1907, pp. 450–459. However, Sheppard's results are not valid under equally general conditions. . The method is based upon a very simple application of Euler—MacLaurin's formula, and the usual corrections are thereby shown to be valid for very general frequency curves, even for those without high contact in one or both directions. The note referred to deals with the case of one variable; the use of the method employed there can, however, easily be extended to an arbitrary number of variables, which extension it is the purpose of this paper to carry through. For the sake of formal simplicity the deductions are performed with two variables; the results can then immediately be generalized.     

Dividend valuation,trading and transactions costs: the 1997 partial abolition of dividend tax credit repayments

Although UK resident tax-exempt shareholders lost the right to repayment of tax credits on dividends paid by UK resident companies in July 1997, they could continue to receive tax credit repayments in respect of dividends received from Irish resident companies until December 1998. In July 1997 the rate of tax credit on Irish companies' dividends was 21%, and this was reduced to 11% in December 1997. We obtain insights into the incentives and behaviour of UK tax-exempt investors in response to these changes in the relative ‘tax attractiveness’ of investments in Irish resident companies. We find that only at its highest rate, 21%, was the level of dividend tax credit on Irish companies' dividends sufficient to induce changes in UK tax-exempt shareholders' investment strategies; and that the propensity for dividend capture by tax-exempt investors is heightened when the dividend tax credit yield is of the order of 0.8 or more and dividend yield is of the order of 2.6% or more.