Multivariate volatility forecasts for stock market indices

Volatility forecasts aim to measure future risk and they are key inputs for financial analysis. In this study, we forecast the realized variance as an observable measure of volatility for several major international stock market indices and accounted for the different predictive information present in jump, continuous, and option-implied variance components. We allowed for volatility spillovers in different stock markets by using a multivariate modeling approach. We used heterogeneous autoregressive (HAR)-type models to obtain the forecasts. Based an out-of-sample forecast study, we show that: (i) including option-implied variances in the HAR model substantially improves the forecast accuracy, (ii) lasso-based lag selection methods do not outperform the parsimonious day-week-month lag structure of the HAR model, and (iii) cross-market spillover effects embedded in the multivariate HAR model have long-term forecasting power.     

How Proper Is Sequential Equilibrium?

A strategy profile of a normal form game is proper if and only if it is quasi-perfect in every extensive form (with that normal form). Thus, properness requires optimality along a sequence of supporting trembles, while sequentiality only requires optimality in the limit. A decision-theoretic implementation of sequential rationality, strategic independence respecting equilibrium (SIRE), is defined and compared to proper equilibrium, using lexicographic probability systems. Finally, we give tremble-based characterizations, which do not involve structural features of the game, of the rankings of strategies that underlie proper equilibrium and SIRE.Journal of Economic LiteratureClassification Numbers: C70, C72.     

Evolution of harvesting strategies: replicator and resource dynamics

Abstract. Economic theories of managing renewable resources, such as fisheries and forestry, traditionally assume that individual harvesters are perfectly rational and thus able to compute the harvesting strategy that maximizes their discounted profits. The current paper presents an alternative approach based on bounded rationality and evolutionary mechanisms. It is assumed that individual harvesters face a choice between two harvesting strategies. The evolution of the distribution of strategies in the population is modeled through a replicator dynamics equation. The latter captures the idea that strategies yielding above average profits are demanded more than strategies yielding below average profits, so that the first type ends up accounting for a larger part in the population. From a mathematical perspective, the combination of resource and evolutionary processes leads to complex dynamics. The paper presents the existence and stability conditions for each steady-state of the system and analyzes dynamic paths to the equilibrium. In addition, effects of changes in prices are analyzed. A main result of the paper is that under certain conditions both strategies can survive in the long-run. Correspondence to: J. Noailly     

Towards a kernel theory of external knowledge integration for high-tech firms: Exploring a failed theory test

Designing information systems (ISs) requires a thorough understanding of the organizational knowledge processes in which these systems are used. Although much is known about internal organizational knowledge processes, the understanding of external knowledge processes is less developed. Hence, this paper reflects an attempt to operationalize and test a model of the process of external knowledge integration (EKI), consisting of an identification, acquisition, and utilization stage. We utilize high-technology based firms from a variety of high-tech categories including nanotechnology based firms since these firms have critical knowledge integration needs. The results of an international survey, with responses of 317 high-tech companies, suggest that not these three EKI-stages, but four organizational effectiveness functions (goal attainment, pattern maintenance, adaptation, and integration) account for most variation in responses. These findings seem to imply that ISs that are to support the EKI-process should be designed according to organizational effectiveness functions rather than to EKI-stages. It is proposed that each organizational effectiveness function imposes different requirements on ISs because users interact differently with IS in each function.     

Evolutionary stability and lexicographic preferences

We explore the interaction between evolutionary stability and lexicographic preferences. To do so, we define a limit Nash equilibrium for a lexicographic game as the limit of Nash equilibria of nearby games with continuous preferences. Nash equilibria of lexicographic games are limit Nash equilibria, but not conversely. Modified evolutionarily stable strategies (Binmore and Samuelson, 1992. J. Econ. Theory 57, 278–305) are limit Nash equilibria. Modified evolutionary stability differs from “lexicographic evolutionarily stability” (defined by extending the common characterization of evolutionary stability to lexicographic preferences) in the order in which limits in the payoff space and the space of invasion barriers are taken.     

A way out of the credibility crisis of models used in integrated environmental assessment

Integrated Assessment Models (IAMs) have been widely used in environmental policy making because they simulate natural and socio-economic systems by integrating knowledge derived from a wide range of disciplines. The current IAMs have been found to be limited due to their inability to display both the value-laden nature of the assumptions that underlie the model and the uncertainties in their outputs. A Post-Normal Science approach is required for dealing with these issues, involving participation of ‘extended peer communities’ providing their ‘extended facts’.     

Environment versus growth — A criticism of “degrowth” and a plea for “a-growth”

In recent debates on environmental problems and policies, the strategy of “degrowth” has appeared as an alternative to the paradigm of economic growth. This new notion is critically evaluated by considering five common interpretations of it. One conclusion is that these multiple interpretations make it an ambiguous and rather confusing concept. Another is that degrowth may not be an effective, let alone an efficient strategy to reduce environmental pressure. It is subsequently argued that “a-growth,” i.e. being indifferent about growth, is a more logical social aim to substitute for the current goal of economic growth, given that GDP (per capita) is a very imperfect indicator of social welfare. In addition, focusing ex ante on public policy is considered to be a strategy which ultimately is more likely to obtain the necessary democratic-political support than an ex ante, explicit degrowth strategy. In line with this, a policy package is proposed which consists of six elements, some of which relate to concerns raised by degrowth supporters.     

Environmental Policy Theory Given Bounded Rationality and Other-regarding Preferences

Established environmental policy theory is based on the assumption of homo economicus. This means that people are seen as fully rational and acting in a self-regarding manner. In line with this, economics emphasizes efficient policy solutions and the associated advantages of price incentives. Behavioral economics offers alternative, more realistic views on individual behavior. In this paper we investigate opportunities to integrate bounded rationality and other-regarding preferences into environmental policy theory to arrive at recommendations for more effective policies. For this purpose, we will address decisions made under risk and uncertainty, intertemporal choice, decision heuristics, other-regarding preferences, heterogeneity, evolutionary selection of behaviors, and the role of happiness. Three aspects of environmental policy are considered in detail, namely sustainable consumption, environmental valuation and policy design. We pay special attention to the role of non-pecuniary, informative instruments and illustrate the implications for climate policy.