Optimal dynamic regulation of carbon emissions market

In this article, we deal with optimal dynamic carbon emission regulation of a set of firms. On the one hand, the regulator dynamically allocates emission allowances to each firm. On the other hand, firms face idiosyncratic, as well as common, economic shocks on emissions, and they have linear quadratic abatement costs. Firms can trade allowances so as to minimize total expected costs, which arise from abatement, trading, and terminal penalty. Using variational methods, we first exhibit in closed form the market equilibrium in function of the regulator's dynamic allocation. We then solve the Stackelberg game between the regulator and the firms. The result is a closed-form expression of the optimal dynamic allocation policies that allow a desired expected emission reduction. The optimal policy is unique in the presence of market impact. In absence of market impact, the optimal policy is nonunique, but all the optimal policies share common properties. The optimal policies are fully responsive, and therefore induce a constant abatement effort and a constant price of allowances. Our results are robust to some extensions, like different penalty functions.     

Analysis of a monetary union enlargement in the framework of linear-quadratic differential games

This paper studies the effects of a monetary union enlargement using the techniques and outcomes from an extensive research project on macroeconomic policy coordination in the EMU. Our approach is characterized by two main pillars: (i) linear-quadratic differential games to capture externalities, spillovers and strategic behaviour of (fiscal and monetary) players; and (ii) endogenous coalition formation concepts which enable us to study a creation and stability of different cooperation arrangements. In this paper we focus on the first pillar and construct a multi-player linear-quadratic continuous-time model of 5 countries and 4 central banks to evaluate effects of accession of a new member to an existing MU. Our findings stress the importance of an asymmetric shock confirming basic results of the OCA theory. It comes out that in our setting it is never profitable to enlarge the monetary union when there is a risk of an asymmetric shock. What is more, the potential losses from accession are so high that it can be barely possible to design a transfer system to compensate for a worse situation of some countries.

Variance estimation for unequal probability sampling

In this paper, we discuss the optimality of the variance estimator of the Horvitz-Thompson estimator proposed by Kott (1988) in the class of model-unbiased quadratic estimators. We also propose some improved estimators over Kott's estimator in the class of general quadratic estimators. Received: February 1999     

BILINEAR TERM STRUCTURE MODEL

The Gaussian Affine Term Structure Model (ATSM) introduced by Duffie and Kan is often used in finance to price derivatives written on interest rates or to compute the reserve to hedge a portfolio of credits (CreditVaR), and in macroeconomic applications to study the links between real activity and financial variables. However, a standard three‐factor ATSM, for instance, implies a deterministic affine relationship between any set of four rates, with different times‐to‐maturity, and these relationships are not observed in practice. In this paper, we introduce a new class of affine term structure models, called Bilinear Term Structure Model (BTSM). This extension breaks down the deterministic relationships between rates in structural factor models by introducing lagged factor values, and the linear dependence by considering quadratic effects of the factors.     

PRICING OPTIONS ON VARIANCE IN AFFINE STOCHASTIC VOLATILITY MODELS

We consider the pricing of options written on the quadratic variation of a given stock price process. Using the Laplace transform approach, we determine semi‐explicit formulas in general affine models allowing for jumps, stochastic volatility, and the leverage effect. Moreover, we show that the joint dynamics of the underlying stock and a corresponding variance swap again are of affine form. Finally, we present a numerical example for the Barndorff‐Nielsen and Shephard model with leverage. In particular, we study the effect of approximating the quadratic variation with its predictable compensator.     

Demand Analysis of Meat in Malaysia

One distinct change in Malaysians' food consumption behavior has been the preference toward meat products. Thus it is meaningful to gain insight of meat consumption patterns. As the market becomes increasingly market-led, information on current meat consumption patterns is required to assess how they are likely to change as prices and incomes change. This study attempts to provide a better understanding of demand for meat products in Malaysia. By utilizing data from Household Expenditure Survey 2004/2005, Engel curve analysis was conducted to derive income elasticities of meat products from QUAIDS model. The estimated income elasticities show that current food consumption patterns are showing signs of convergence toward a Western diet, exhibiting tendency for preference toward red meats (mutton and beef) over white meats (poultry and pork). The estimated elastic own-price elasticities indicate that Malaysian consumers are sensitive to the change in prices of the meat products, with other things remain constant.     

RUNNING FOR THE EXIT: DISTRESSED SELLING AND ENDOGENOUS CORRELATION IN FINANCIAL MARKETS

We propose a simple multiperiod model of price impact from trading in a market with multiple assets, which illustrates how feedback effects due to distressed selling and short selling lead to endogenous correlations between asset classes. We show that distressed selling by investors exiting a fund and short selling of the fund’s positions by traders may have nonnegligible impact on the realized correlations between returns of assets held by the fund. These feedback effects may lead to positive realized correlations between fundamentally uncorrelated assets, as well as an increase in correlations across all asset classes and in the fund’s volatility which is exacerbated in scenarios in which the fund undergoes large losses. By studying the diffusion limit of our discrete time model, we obtain analytical expressions for the realized covariance and show that the realized covariance may be decomposed as the sum of a fundamental covariance and a liquidity‐dependent “excess” covariance. Finally, we examine the impact of these feedback effects on the volatility of other funds. Our results provide insight into the nature of spikes in correlation associated with the failure or liquidation of large funds.     

SEPARABLE TERM STRUCTURES AND THE MAXIMAL DEGREE PROBLEM

This paper discusses separablc term structure diffusion models in an arbitrage-free environment. Using general consistency results we exploit the interplay between the diffusion coefficients and the functions determining the forward curve. We introduce the particular class of polynomial term structure models. We formulate the appropriate conditions under which the diffusion for a quadratic term structure model is necessarily an Ornstein-Uhlenbeck type process. Finally, we explore the maximal degree problem and show that basically any consistent polynomial term structure model is of degree two or less.     

Adapting Productivity Theory to the Quadratic Cost Function. An Application to the Spanish Electric Sector

In this article we have adapted productivity analysis to the case of a cost model using a quadratic cost function and discrete data. The main theoretical result is a productivity index that can be decomposed into modified versions of the contribution of technical change and the effect of the variations in the scale of production. This framework has been applied to the study of the Spanish electric sector from 1985 to 1996, during which relevant regulatory changes were introduced in order to increase productivity. For this, a normalized quadratic cost function was estimated. The results show important productivity gains with both technical change and scale effect playing important roles.