The Stochastic Behavior of Commodity Prices: Implications for Valuation and Hedging

In this article we compare three models of the stochastic behavior of commodity prices that take into account mean reversion, in terms of their ability to price existing futures contracts, and their implication with respect to the valuation of other financial and real assets. The first model is a simple one-factor model in which the logarithm of the spot price of the commodity is assumed to follow a mean reverting process. The second model takes into account a second stochastic factor, the convenience yield of the commodity, which is assumed to follow a mean reverting process. Finally, the third model also includes stochastic interest rates. The Kalman filter methodology is used to estimate the parameters of the three models for two commercial commodities, copper and oil, and one precious metal, gold. The analysis reveals strong mean reversion in the commercial commodity prices. Using the estimated parameters, we analyze the implications of the models for the term structure of futures prices and volatilities beyond the observed contracts, and for hedging contracts for future delivery. Finally, we analyze the implications of the models for capital budgeting decisions.     

CURRENCY SUBSTITUTION, U.S. MONEY DEMAND, AND INTERNATIONAL INTERDEPENDENCE

A number of writers have argued in recent years that massive international currency substitution has been a major cause of exchange rate volatility and monetary instability in the United States and other major countries. Such analysis is frequently coupled with recommendations for a return to pegged exchange rates. This paper critically examines the evidence presented for this currency substitution view. It argues that the weight of latest research suggests that direct international currency substitution has not been of major quantitative importance for the U.S. However, empirical evidence supports traditional views that international capital mobility can generate substantial short-run monetary interdependence even under flexible exchange rates. Thus, even though international currency substitution is of little importance to U.S. monetary conditions, a broader range of international considerations may be of considerable importance for the U.S. economy.     

Do analysts add value when they most can? Evidence from corporate spin‐offs

This article investigates how securities analysts help investors understand the value of diversification. By studying the research that analysts produce about companies that have announced corporate spin‐offs, we gain unique insights into how analysts portray diversified firms to the investment community. We find that while analysts' research about these companies is associated with improved forecast accuracy, the value of their research about the spun‐off subsidiaries is more limited. For both diversified firms and their spun‐off subsidiaries, analysts' research is more valuable when information asymmetry between the management of these entities and investors is higher. These findings contribute to the corporate strategy literature by shedding light on the roots of the diversification discount and by showing how analysts' research enables investors to overcome asymmetric information. Copyright © 2013 John Wiley & Sons, Ltd.     

Limit Order Trading

We analyze the rationale for limit order trading. Use of limit orders involves two risks: 1) an adverse information event can trigger an undesirable execution, and 2) favorable news can result in a desirable execution not being obtained. On the other hand, a paucity of limit orders can result in accentuated short-term price fluctuations that compensate a limit order trader. Our empirical tests suggest that trading via limit orders dominates trading via market orders for market participants with relatively well balanced portfolios, and that placing a network of buy and sell limit orders as a pure trading strategy is profitable.     

Higher education and firms: on the interaction between research and regional policies

In the European Union, a series of competencies are shared between a central agency called the European Commission, and the governments of the Member States. This paper focuses on two of those policies: research and regional development. Here, we model and discuss how the level of commitment of a central authority toward poor regions affects the design of the best decision-making process. We explore cases of full centralization and full decentralization, and situations where the two levels of government are allowed to take decisions, either simultaneously or sequentially. In the latter case, we make a distinction between a situation where the central agency decides first as in most federations, and one in which it decides second, then being an agent of national governments. This setting is especially relevant for the European Union. We show, in particular, that when the degree of commitment of the center is high, assignment of redistributive competencies to both levels of power is a proxy for centralization. Additionally, the poorer region may find its best interest in an institutional design where the regions decide first.     

Consumer life styles and market segmentation

Consumer behaviorists faced with the task of segmenting markets increasingly turn to the study of consumer life styles. The life style concept and its role in predicting consumer decisions are analyzed here. One methodology known as AIO or life style research has proven especially useful in identifying heavy users of specific product categories. Three representative AIO portraits—for beer, eye make-up, and bank credit cards—are outlined. An evaluation of life styles as a systems concept suggests bright prospects for presenting research findings to clients, formulating creative strategies, positioning products and services and selecting media. C. W. Post Center, L.I.U. Doubleday Advertising Co.