Long-term equity anticipation securities and stock market volatility dynamics

Recent empirical findings suggest that the long-run dependence in U.S. stock market volatility is best described by a slowly mean-reverting fractionally integrated process. The present study complements this existing time-series-based evidence by comparing the risk-neutralized option pricing distributions from various ARCH-type formulations. Utilizing a panel data set consisting of newly created exchange traded long-term equity anticipation securities, or leaps, on the Standard and Poor's 500 stock market index with maturity times ranging up to three years, we find that the degree of mean reversion in the volatility process implicit in these prices is best described by a Fractionally Integrated EGARCH (FIEGARCH) model. © 1999 Elsevier Science S.A. All rights reserved.

Nonparametric estimation of structural models for high-frequency currency market data

Empirical modeling of high-frequency currency market data reveals substantial evidence for nonnormality, stochastic volatility, and other nonlinearities. This paper investigates whether an equilibrium monetary model can account for nonlinearities in weekly data. The model incorporates time-nonseparable preferences and a transaction cost technology. Simulated sample paths are generated using Marcet's parameterized expectations procedure. The paper also develops a new method for estimation of structural economic models. The method forces the model to match (under a GMM criterion) the score function of a nonparametric estimate of the conditional density of observed data. The estimation uses weekly U.S.-German currency market data, 1975-90. © 1995.

Bid-ask spreads and volatility in the foreign exchange market. An empirical analysis

Consistent with the implications from a simple asymmetric information model for the bid-ask spread, we present empirical evidence that the size of the bid-ask spread in the foreign exchange market is positively related to the underlying exchange rate uncertainty. The estimation results are based on an ordered probit analysis that captures the discreteness in the spread distribution, with the uncertainty of the spot exchange rate being quantified through a GARCH type model. The data sets consists of more than 300,000 continuously recorded Deutschemark/dollar quotes over the period from April 1989 to June 1989. © 1994.

Economics of new oncology drug development.

PURPOSE: Review existing studies and provide new results on the development, regulatory, and market aspects of new oncology drug development. METHODS: We utilized data from the US Food and Drug Administration (FDA), company surveys, and publicly available commercial business intelligence databases on new oncology drugs approved in the United States and on investigational oncology drugs to estimate average development and regulatory approval times, clinical approval success rates, first-in-class status, and global market diffusion. RESULTS: We found that approved new oncology drugs to have a disproportionately high share of FDA priority review ratings, of orphan drug designations at approval, and of drugs that were granted inclusion in at least one of the FDA's expedited access programs. US regulatory approval times were shorter, on average, for oncology drugs (0.5 years), but US clinical development times were longer on average (1.5 years). Clinical approval success rates were similar for oncology and other drugs, but proportionately more of the oncology failures reached expensive late-stage clinical testing before being abandoned. In relation to other drugs, new oncology drug approvals were more often first-in-class and diffused more widely across important international markets. CONCLUSION: The market success of oncology drugs has induced a substantial amount of investment in oncology drug development in the last decade or so. However, given the great need for further progress, the extent to which efforts to develop new oncology drugs will grow depends on future public-sector investment in basic research, developments in translational medicine, and regulatory reforms that advance drug-development science.

Cost Heterogeneity and the Potential Savings from Market-Based Policies

Policy makers and analysts are often faced with situations where it is unclear whether market-based instruments hold real promise of reducing costs, relative to conventional uniform standards. We develop analytic expressions that can be employed with modest amounts of information to estimate the potential cost savings associated with market-based policies, with an application to the environmental policy realm. These simple formulae can identify instruments that merit more detailed investigation. We illustrate the use of these results with an application to nitrogen oxides control by electric utilities in the United States.

The empirical analysis of cigarette tax avoidance and illicit trade in Vietnam, 1998-2010.

Illicit trade carries the potential to magnify existing tobacco-related health care costs through increased availability of untaxed and inexpensive cigarettes. What is known with respect to the magnitude of illicit trade for Vietnam is produced primarily by the industry, and methodologies are typically opaque. Independent assessment of the illicit cigarette trade in Vietnam is vital to tobacco control policy. This paper measures the magnitude of illicit cigarette trade for Vietnam between 1998 and 2010 using two methods, discrepancies between legitimate domestic cigarette sales and domestic tobacco consumption estimated from surveys, and trade discrepancies as recorded by Vietnam and trade partners. The results indicate that Vietnam likely experienced net smuggling in during the period studied. With the inclusion of adjustments for survey respondent under-reporting, inward illicit trade likely occurred in three of the four years for which surveys were available. Discrepancies in trade records indicate that the value of smuggled cigarettes into Vietnam ranges from $100 million to $300 million between 2000 and 2010 and that these cigarettes primarily originate in Singapore, Hong Kong, Macao, Malaysia, and Australia. Notable differences in trends over time exist between the two methods, but by comparison, the industry estimates consistently place the magnitude of illicit trade at the upper bounds of what this study shows. The unavailability of annual, survey-based estimates of consumption may obscure the true, annual trend over time. Second, as surveys changed over time, estimates relying on them may be inconsistent with one another. Finally, these two methods measure different components of illicit trade, specifically consumption of illicit cigarettes regardless of origin and smuggling of cigarettes into a particular market. However, absent a gold standard, comparisons of different approaches to illicit trade measurement serve efforts to refine and improve measurement approaches and estimates.

A COMPARISON OF MARKET CLEARING TOOLS IN ELECTRICITY SYSTEMS

To maintain a strict balance between demand and supply in the US power systems, the Independent System Operators (ISOs) schedule power plants and determine electricity prices using a market clearing model. This model determines for each time period and power plant, the times of startup, shutdown, the amount of power production, and the provisioning of spinning and non-spinning power generation reserves, etc. Such a deterministic optimization model takes as input the characteristics of all the generating units such as their power generation installed capacity, ramp rates, minimum up and down time requirements, and marginal costs for production, as well as the forecast of intermittent energy such as wind and solar, along with the minimum reserve requirement of the whole system. This reserve requirement is determined based on the likelihood of outages on the supply side and on the levels of error forecasts in demand and intermittent generation. With increased installed capacity of intermittent renewable energy, determining the appropriate level of reserve requirements has become harder. Stochastic market clearing models have been proposed as an alternative to deterministic market clearing models. Rather than using a fixed reserve targets as an input, stochastic market clearing models take different scenarios of wind power into consideration and determine reserves schedule as output. Using a scaled version of the power generation system of PJM, a regional transmission organization (RTO) that coordinates the movement of wholesale electricity in all or parts of 13 states and the District of Columbia, and wind scenarios generated from BPA (Bonneville Power Administration) data, this paper explores a comparison of the performance between a stochastic and deterministic model in market clearing. The two models are compared in their ability to contribute to the affordability, reliability and sustainability of the electricity system, measured in terms of total operational costs, load shedding and air emissions. The process of building the models and running for tests indicate that a fair comparison is difficult to obtain due to the multi-dimensional performance metrics considered here, and the difficulty in setting up the parameters of the models in a way that does not advantage or disadvantage one modeling framework. Along these lines, this study explores the effect that model assumptions such as reserve requirements, value of lost load (VOLL) and wind spillage costs have on the comparison of the performance of stochastic vs deterministic market clearing models.

A tale of two market failures: Technology and environmental policy

Market failures associated with environmental pollution interact with market failures associated with the innovation and diffusion of new technologies. These combined market failures provide a strong rationale for a portfolio of public policies that foster emissions reduction as well as the development and adoption of environmentally beneficial technology. Both theory and empirical evidence suggest that the rate and direction of technological advance is influenced by market and regulatory incentives, and can be cost-effectively harnessed through the use of economic-incentive based policy. In the presence of weak or nonexistent environmental policies, investments in the development and diffusion of new environmentally beneficial technologies are very likely to be less than would be socially desirable. Positive knowledge and adoption spillovers and information problems can further weaken innovation incentives. While environmental technology policy is fraught with difficulties, a long-term view suggests a strategy of experimenting with policy approaches and systematically evaluating their success. © 2005 Elsevier B.V. All rights reserved.

Illicit cigarette consumption and government revenue loss in Indonesia.

BACKGROUND: Illicit cigarettes comprise more than 11% of tobacco consumption and 17% of consumption in low- and middle-income countries. Illicit cigarettes, defined as those that evade taxes, lower consumer prices, threaten national tobacco control efforts, and reduce excise tax collection. METHODS: This paper measures the magnitude of illicit cigarette consumption within Indonesia using two methods: the discrepancies between legal cigarette sales and domestic consumption estimated from surveys, and discrepancies between imports recorded by Indonesia and exports recorded by trade partners. Smuggling plays a minor role in the availability of illicit cigarettes because Indonesians predominantly consume kreteks, which are primarily manufactured in Indonesia. RESULTS: Looking at the period from 1995 to 2013, illicit cigarettes first emerged in 2004. When no respondent under-reporting is assumed, illicit consumption makes up 17% of the domestic market in 2004, 9% in 2007, 11% in 2011, and 8% in 2013. Discrepancies in the trade data indicate that Indonesia was a recipient of smuggled cigarettes for each year between 1995 and 2012. The value of this illicit trade ranges from less than $1 million to nearly $50 million annually. Singapore, China, and Vietnam together accounted for nearly two-thirds of trade discrepancies over the period. Tax losses due to illicit consumption amount to between Rp 4.1 and 9.3 trillion rupiah, 4% to 13% of tobacco excise revenue, in 2011 and 2013. CONCLUSIONS: Due to the predominance of kretek consumption in Indonesia and Indonesia's status as the predominant producer of kreteks, illicit domestic production is likely the most important source for illicit cigarettes, and initiatives targeted to combat this illicit production carry the promise of the greatest potential impact.