Collusion in a Bertrand duopoly model with decreasing returns and product differentiation

We study cartel stability in a differentiated price-setting duopoly with returns to scale. We show that a cartel may be equally stable in the presence of lower differentiation, provided that the decreasing returns parameter is high. In addition we demonstrate that for a given factor of discount, there are technologies that can have decreasing returns to scale where the cartel always is stable independent of the differentiation degree.

Time-variations in commodity price jumps

In this paper, we study jumps in commodity prices. Unlike assumed in existing models of commodity price dynamics, a simple analysis of the data reveals that the probability of tail events is not constant but depends on the time of the year, i.e. exhibits seasonality. We propose a stochastic volatility jump–diffusion model to capture this seasonal variation. Applying the Markov Chain Monte Carlo (MCMC) methodology, we estimate our model using 20 years of futures data from four different commodity markets. We find strong statistical evidence to suggest that our model with seasonal jump intensity outperforms models featuring a constant jump intensity. To demonstrate the practical relevance of our findings, we show that our model typically improves Value-at-Risk (VaR) forecasts.

Flight to quality? An investigation of changing price spreads in commercial real estate markets

Purpose – The purpose of this paper is to investigate the effect of the crisis on the pricing of asset quality attributes. This paper uses sales transaction data to examine whether flight from risk phenomena took place in the US office market during the financial crisis of 2007-2009. Design/methodology/approach – Hedonic regression procedures are used to test the hypothesis that the spread between the pricing of low-quality and high-quality characteristics increased during the crisis period compared to the pre-crisis period. Findings – The results of the hedonic regression models suggest that the price spread between Class A and other properties grew significantly during the downturn. Research limitations/implications – Our results are consistent with the hypothesis of an increased price spread following a market downturn between Class A and non-Class A offices. The evidence suggests that the relationships between the returns on Class A and non-Class A assets changed during the period of market stress or crisis. Practical implications – These findings have implications for real estate portfolio construction. If regime switches can be predicted and/or responded to rapidly, portfolios may be rebalanced. In crisis periods, portfolios might be reweighted towards Class A properties and in positive market periods, the reweighting would be towards non-Class A assets. Social implications – The global financial crisis has demonstrated that real estate markets play a crucial role in modern economies and that negative developments in these markets have the potential to spillover and create contagion for the larger economy, thereby affecting jobs, incomes and ultimately people’s livelihoods. Originality/value – This is one of the first studies that address the flight to quality phenomenon in commercial real estate markets during periods of financial crisis and market turmoil.

Electroweak precision constraints on the Lee-Wick standard model

We perform an analysis of the electroweak precision observables in the Lee-Wick Standard Model. The most stringent restrictions come from the S and T parameters that receive important tree level and one loop contributions. In general the model predicts a large positive S and a negative T. To reproduce the electroweak data, if all the Lee-Wick masses are of the same order, the Lee-Wick scale is of order 5 TeV. We show that it is possible to find some regions in the parameter space with a fermionic state as light as 2.4-3.5 TeV, at the price of rising all the other masses to be larger than 5-8 TeV. To obtain a light Higgs with such heavy resonances a fine-tuning of order a few per cent, at least, is needed. We also propose a simple extension of the model including a fourth generation of Standard Model fermions with their Lee-Wick partners. We show that in this case it is possible to pass the electroweak constraints with Lee-Wick fermionic masses of order 0.4-1.5 TeV and Lee-Wick gauge masses of order 3 TeV.

STABILITY ANALYSIS WITH APPLICATIONS OF A TWO-DIMENSIONAL DYNAMICAL SYSTEM ARISING FROM A STOCHASTIC MODEL FOR AN ASSET MARKET

We analyze the stability properties of equilibrium solutions and periodicity of orbits in a two-dimensional dynamical system whose orbits mimic the evolution of the price of an asset and the excess demand for that asset. The construction of the system is grounded upon a heterogeneous interacting agent model for a single risky asset market. An advantage of this construction procedure is that the resulting dynamical system becomes a macroscopic market model which mirrors the market quantities and qualities that would typically be taken into account solely at the microscopic level of modeling. The system`s parameters correspond to: (a) the proportion of speculators in a market; (b) the traders` speculative trend; (c) the degree of heterogeneity of idiosyncratic evaluations of the market agents with respect to the asset`s fundamental value; and (d) the strength of the feedback of the population excess demand on the asset price update increment. This correspondence allows us to employ our results in order to infer plausible causes for the emergence of price and demand fluctuations in a real asset market. The employment of dynamical systems for studying evolution of stochastic models of socio-economic phenomena is quite usual in the area of heterogeneous interacting agent models. However, in the vast majority of the cases present in the literature, these dynamical systems are one-dimensional. Our work is among the few in the area that construct and study analytically a two-dimensional dynamical system and apply it for explanation of socio-economic phenomena.

Hydropower Energy Simulation Using Mike 11 Model; A Case Study In South Germany's Small Run-Of-River Hydropower Plants

Renewable energy production is a basic supplement to stabilize rapidly increasing global energy demand and skyrocketing energy price as well as to balance the fluctuation of supply from non-renewable energy sources at electrical grid hubs. The European energy traders, government and private company energy providers and other stakeholders have been, since recently, a major beneficiary, customer and clients of Hydropower simulation solutions. The relationship between rainfall-runoff model outputs and energy productions of hydropower plants has not been clearly studied. In this research, association of rainfall, catchment characteristics, river network and runoff with energy production of a particular hydropower station is examined. The essence of this study is to justify the correspondence between runoff extracted from calibrated catchment and energy production of hydropower plant located at a catchment outlet; to employ a unique technique to convert runoff to energy based on statistical and graphical trend analysis of the two, and to provide environment for energy forecast. For rainfall-runoff model setup and calibration, MIKE 11 NAM model is applied, meanwhile MIKE 11 SO model is used to track, adopt and set a control strategy at hydropower location for runoff-energy correlation. The model is tested at two selected micro run-of-river hydropower plants located in South Germany. Two consecutive calibration is compromised to test the model; one for rainfall-runoff model and other for energy simulation. Calibration results and supporting verification plots of two case studies indicated that simulated discharge and energy production is comparable with the measured discharge and energy production respectively.

The role of no-arbitrage on forecasting: lessons from a parametric term structure model

Parametric term structure models have been successfully applied to innumerous problems in fixed income markets, including pricing, hedging, managing risk, as well as studying monetary policy implications. On their turn, dynamic term structure models, equipped with stronger economic structure, have been mainly adopted to price derivatives and explain empirical stylized facts. In this paper, we combine flavors of those two classes of models to test if no-arbitrage affects forecasting. We construct cross section (allowing arbitrages) and arbitrage-free versions of a parametric polynomial model to analyze how well they predict out-of-sample interest rates. Based on U.S. Treasury yield data, we find that no-arbitrage restrictions significantly improve forecasts. Arbitrage-free versions achieve overall smaller biases and Root Mean Square Errors for most maturities and forecasting horizons. Furthermore, a decomposition of forecasts into forward-rates and holding return premia indicates that the superior performance of no-arbitrage versions is due to a better identification of bond risk premium.

On choice of technique in the Robinson-Solow-Srinivasan model

We report results on the optimal \choice of technique" in a model originally formulated by Robinson, Solow and Srinivasan (henceforth, the RSS model) and further discussed by Okishio and Stiglitz. By viewing this vintage-capital model without discounting as a speci c instance of the general theory of intertemporal resource allocation associated with Brock, Gale and McKenzie, we resolve longstanding conjectures in the form of theorems on the existence and price support of optimal paths, and of conditions suÆcient for the optimality of a policy rst identi ed by Stiglitz. We dispose of the necessity of these conditions in surprisingly simple examples of economies in which (i) an optimal path is periodic, (ii) a path following Stiglitz' policy is bad, and (iii) there is optimal investment in di erent vintages at di erent times. (129 words)

Can a habit formation model really explain the Forward Premium Anomaly?

Verdelhan (2009) mostra que desejando-se explicar o comporta- mento do prêmio de risco nos mercados de títulos estrangeiros usando- se o modelo de formação externa de hábitos proposto por Campbell e Cochrane (1999) será necessário especi car o retorno livre de risco de equilíbrio de maneira pró-cíclica. Mostramos que esta especi cação só é possível sobre parâmetros de calibração implausíveis. Ainda no processo de calibração, para a maioria dos parâmetros razoáveis, a razão preço-consumo diverge. Entretanto, adotando a sugestão pro- posta por Verdelhan (2009) - de xar a função sensibilidade (st) no seu valor de steady-state durante a calibração e liberá-la apenas du- rante a simulação dos dados para se garantir taxas livre de risco pró- cíclicas - conseguimos encontrar um valor nito e bem comportado para a razão preço-consumo de equilíbrio e replicar o foward premium anom- aly. Desconsiderando possíveis inconsistências deste procedimento, so- bre retornos livres de risco pró-cíclicos, conforme sugerido por Wachter (2006), o modelo utilizado gera curvas de yields reais decrescentes na maturidade, independentemente do estado da economia - resultado que se opõe à literatura subjacente e aos dados reais sobre yields.

Can a habit formation model really explain the forward premium anomaly?

Verdelhan (2009) shows that if one is to explain the foreign exchange forward premium behavior using Campbell and Cochrane (1999)’s habit formation model one must specify it in such a way to generate pro-cyclical short term risk free rates. At the calibration procedure, we show that this is only possible in Campbell and Cochrane’s framework under implausible parameters specifications given that the price-consumption ratio diverges in almost all parameters sets. We, then, adopt Verdelhan’s shortcut of fixing the sensivity function λ(st) at its steady state level to attain a finite value for the price-consumption ratio and release it in the simulation stage to ensure pro-cyclical risk free rates. Beyond the potential inconsistencies that such procedure may generate, as suggested by Wachter (2006), with procyclical risk free rates the model generates a downward sloped real yield curve, which is at odds with the data.

Risk sharing and the household collective model

When the joint assumption of optimal risk sharing and coincidence of beliefs is added to the collective model of Browning and Chiappori (1998) income pooling and symmetry of the pseudo-Hicksian matrix are shown to be restored. Because these are also the features of the unitary model usually rejected in empirical studies one may argue that these assumptions are at odds with evidence. We argue that this needs not be the case. The use of cross-section data to generate price and income variation is based Oil a definition of income pooling or symmetry suitable for testing the unitary model, but not the collective model with risk sharing. AIso, by relaxing assumptions on beliefs, we show that symmetry and income pooling is lost. However, with usual assumptions on existence of assignable goods, we show that beliefs are identifiable. More importantly, if di:fferences in beliefs are not too extreme, the risk sharing hypothesis is still testable.

Tayloring Brazil: a system dynamics model for monetary policy feedback

The thesis introduces a system dynamics Taylor rule model of new Keynesian nature for monetary policy feedback in Brazil. The nonlinear Taylor rule for interest rate changes con-siders gaps and dynamics of GDP growth and inflation. The model closely tracks the 2004 to 2011 business cycle and outlines the endogenous feedback between the real interest rate, GDP growth and inflation. The model identifies a high degree of endogenous feedback for monetary policy and inflation, while GDP growth remains highly exposed to exogenous eco-nomic conditions. The results also show that the majority of the monetary policy moves during the sample period was related to GDP growth, despite higher coefficients of inflation parameters in the Taylor rule. This observation challenges the intuition that inflation target-ing leads to a dominance of monetary policy moves with respect to inflation. Furthermore, the results suggest that backward looking price-setting with respect to GDP growth has been the dominant driver of inflation. Moreover, simulation exercises highlight the effects of the new BCB strategy initiated in August 2011 and also consider recession and inflation avoid-ance versions of the Taylor rule. In methodological terms, the Taylor rule model highlights the advantages of system dynamics with respect to nonlinear policies and to the stock-and-flow approach. In total, the strong historical fit and some counterintuitive observations of the Taylor rule model call for an application of the model to other economies.

Forecasting multivariate time series under present-value-model short- and long-run co-movement restrictions

It is well known that cointegration between the level of two variables (e.g. prices and dividends) is a necessary condition to assess the empirical validity of a present-value model (PVM) linking them. The work on cointegration,namelyon long-run co-movements, has been so prevalent that it is often over-looked that another necessary condition for the PVM to hold is that the forecast error entailed by the model is orthogonal to the past. This amounts to investigate whether short-run co-movememts steming from common cyclical feature restrictions are also present in such a system. In this paper we test for the presence of such co-movement on long- and short-term interest rates and on price and dividend for the U.S. economy. We focuss on the potential improvement in forecasting accuracies when imposing those two types of restrictions coming from economic theory.

A (semi-)parametric functional coefficient autoregressive conditional duration model

In this paper, we propose a class of ACD-type models that accommodates overdispersion, intermittent dynamics, multiple regimes, and sign and size asymmetries in financial durations. In particular, our functional coefficient autoregressive conditional duration (FC-ACD) model relies on a smooth-transition autoregressive specification. The motivation lies on the fact that the latter yields a universal approximation if one lets the number of regimes grows without bound. After establishing that the sufficient conditions for strict stationarity do not exclude explosive regimes, we address model identifiability as well as the existence, consistency, and asymptotic normality of the quasi-maximum likelihood (QML) estimator for the FC-ACD model with a fixed number of regimes. In addition, we also discuss how to consistently estimate using a sieve approach a semiparametric variant of the FC-ACD model that takes the number of regimes to infinity. An empirical illustration indicates that our functional coefficient model is flexible enough to model IBM price durations.

Price discovery in dual-class shares across multiple markets

We extend the standard price discovery analysis to estimate the information share of dual-class shares across domestic and foreign markets. By examining both common and preferred shares, we aim to extract information not only about the fundamental value of the rm, but also about the dual-class premium. In particular, our interest lies on the price discovery mechanism regulating the prices of common and preferred shares in the BM&FBovespa as well as the prices of their ADR counterparts in the NYSE and in the Arca platform. However, in the presence of contemporaneous correlation between the innovations, the standard information share measure depends heavily on the ordering we attribute to prices in the system. To remain agnostic about which are the leading share class and market, one could for instance compute some weighted average information share across all possible orderings. This is extremely inconvenient given that we are dealing with 2 share prices in Brazil, 4 share prices in the US, plus the exchange rate (and hence over 5,000 permutations!). We thus develop a novel methodology to carry out price discovery analyses that does not impose any ex-ante assumption about which share class or trading platform conveys more information about shocks in the fundamental price. As such, our procedure yields a single measure of information share, which is invariant to the ordering of the variables in the system. Simulations of a simple market microstructure model show that our information share estimator works pretty well in practice. We then employ transactions data to study price discovery in two dual-class Brazilian stocks and their ADRs. We uncover two interesting ndings. First, the foreign market is at least as informative as the home market. Second, shocks in the dual-class premium entail a permanent e ect in normal times, but transitory in periods of nancial distress. We argue that the latter is consistent with the expropriation of preferred shareholders as a class.