A smooth transition logit model of the effects of deregulation in the electricity market

This paper introduces the smooth transition logit (STL) model that is designed to detect and model situations in which there is structural change in the behaviour underlying the latent index from which the binary dependent variable is constructed. The maximum likelihood estimators of the parameters of the model are derived along with their asymptotic properties, together with a Lagrange multiplier test of the null hypothesis of linearity in the underlying latent index. The development of the STL model is motivated by the desire to assess the impact of deregulation in the Queensland electricity market and ascertain whether increased competition has resulted in significant changes in the behaviour of the spot price of electricity, specifically with respect to the occurrence of periodic abnormally high prices. The model allows the timing of any change to be endogenously determined and also market participants' behaviour to change gradually over time. The main results provide clear evidence in support of a structural change in the nature of price events, and the endogenously determined timing of the change is consistent with the process of deregulation in Queensland.

Implications of gain functions in fisheries management

The appealing concept of optimal harvesting is often used in fisheries to obtain new management strategies. However, optimality depends on the objective function, which often varies, reflecting the interests of different groups of people. The aim of maximum sustainable yield is to extract the greatest amount of food from replenishable resources in a sustainable way. Maximum sustainable yield may not be desirable from an economic point of view. Maximum economic yield that maximizes the profit of fishing fleets (harvesting sector) but ignores socio-economic benefits such as employment and other positive externalities. It may be more appropriate to use the maximum economic yield that which is based on the value chain of the overall fishing sector, to reflect better society's interests. How to make more efficient use of a fishery for society rather than fishing operators depends critically on the gain function parameters including multiplier effects and inclusion or exclusion of certain costs. In particular, the optimal effort level based on the overall value chain moves closer to the optimal effort for the maximum sustainable yield because of the multiplier effect. These issues are illustrated using the Australian Northern Prawn Fishery.

Testing against changing correlation

A test for time-varying correlation is developed within the framework of a dynamic conditional score (DCS) model for both Gaussian and Student t-distributions. The test may be interpreted as a Lagrange multiplier test and modified to allow for the estimation of models for time-varying volatility in the individual series. Unlike standard moment-based tests, the score-based test statistic includes information on the level of correlation under the null hypothesis and local power arguments indicate the benefits of doing so. A simulation study shows that the performance of the score-based test is strong relative to existing tests across a range of data generating processes. An application to the Hong Kong and South Korean equity markets shows that the new test reveals changes in correlation that are not detected by the standard moment-based test.