Studies on the international effects of real shocks

This doctoral thesis addresses the macroeconomic effects of real shocks in open economies in flexible exchange rate regimes. The first study of this thesis analyses the welfare effects of fiscal policy in a small open economy, where private and government consumption are substitutes in terms of private utility. The main findings are as follows: fiscal policy raises output, bringing it closer to its efficient level, but is not welfare-improving even though government spending directly affects private utility. The main reason for this is that the introduction of useful government spending implies a larger crowding-out effect on private consumption, when compared with the `pure waste' case. Utility decreases since one unit of government consumption yields less utility than one unit of private consumption. The second study of this thesis analyses the question of how the macroeconomic effects of fiscal policy in a small open economy depend on optimal intertemporal behaviour. The key result is that the effects of fiscal policy depend on the size of the elasticity of substitution between traded and nontraded goods. In particular, the sign of the current account response to fiscal policy depends on the interplay between the intertemporal elasticity of aggregate consumption and the elasticity of substitution between traded and nontraded goods. The third study analyses the consequences of productive government spending on the international transmission of fiscal policy. A standard result in the New Open Economy Macroeconomics literature is that a fiscal shock depreciates the exchange rate. I demonstrate that the response of the exchange rate depends on the productivity of government spending. If productivity is sufficiently high, a fiscal shock appreciates the exchange rate. It is also shown that the introduction of productive government spending increases both domestic and foreign welfare, when compared with the case where government spending is wasted. The fourth study analyses the question of how the international transmission of technology shocks depends on the specification of nominal rigidities. A growing body of empirical evidence suggests that a positive technology shock leads to a temporary decline in employment. In this study, I demonstrate that the open economy dimension can enhance the ability of sticky price models to account for the evidence. The reasoning is as follows. An improvement in technology appreciates the nominal exchange rate. Under producer-currency pricing, the exchange rate appreciation shifts global demand toward foreign goods away from domestic goods. This causes a temporary decline in domestic employment.

A heterogeneous computing approach to simulation of the Heston Stochastic Volatility Model

Stochastic volatility models are of fundamental importance to the pricing of derivatives. One of the most commonly used models of stochastic volatility is the Heston Model in which the price and volatility of an asset evolve as a pair of coupled stochastic differential equations. The computation of asset prices and volatilities involves the simulation of many sample trajectories with conditioning. The problem is treated using the method of particle filtering. While the simulation of a shower of particles is computationally expensive, each particle behaves independently making such simulations ideal for massively parallel heterogeneous computing platforms. In this paper, we present our portable Opencl implementation of the Heston model and discuss its performance and efficiency characteristics on a range of architectures including Intel cpus, Nvidia gpus, and Intel Many-Integrated-Core (mic) accelerators.

Elements of Volatility at High Frequency

Volatility is central in options pricing and risk management. It reflects the uncertainty of investors and the inherent instability of the economy. Time series methods are among the most widely applied scientific methods to analyze and predict volatility. Very frequently sampled data contain much valuable information about the different elements of volatility and may ultimately reveal the reasons for time varying volatility. The use of such ultra-high-frequency data is common to all three essays of the dissertation. The dissertation belongs to the field of financial econometrics. The first essay uses wavelet methods to study the time-varying behavior of scaling laws and long-memory in the five-minute volatility series of Nokia on the Helsinki Stock Exchange around the burst of the IT-bubble. The essay is motivated by earlier findings which suggest that different scaling laws may apply to intraday time-scales and to larger time-scales, implying that the so-called annualized volatility depends on the data sampling frequency. The empirical results confirm the appearance of time varying long-memory and different scaling laws that, for a significant part, can be attributed to investor irrationality and to an intraday volatility periodicity called the New York effect. The findings have potentially important consequences for options pricing and risk management that commonly assume constant memory and scaling. The second essay investigates modelling the duration between trades in stock markets. Durations convoy information about investor intentions and provide an alternative view at volatility. Generalizations of standard autoregressive conditional duration (ACD) models are developed to meet needs observed in previous applications of the standard models. According to the empirical results based on data of actively traded stocks on the New York Stock Exchange and the Helsinki Stock Exchange the proposed generalization clearly outperforms the standard models and also performs well in comparison to another recently proposed alternative to the standard models. The distribution used to derive the generalization may also prove valuable in other areas of risk management. The third essay studies empirically the effect of decimalization on volatility and market microstructure noise. Decimalization refers to the change from fractional pricing to decimal pricing and it was carried out on the New York Stock Exchange in January, 2001. The methods used here are more accurate than in the earlier studies and put more weight on market microstructure. The main result is that decimalization decreased observed volatility by reducing noise variance especially for the highly active stocks. The results help risk management and market mechanism designing.

Essays on the Economics of Intellectual Property Rights

Väitöskirjassani tarkastelen informaatiohyödykkeiden ja tekijänoikeuksien taloustiedettä kahdesta eri perspektiivistä. Niistä ensimmäinen kuuluu endogeenisen kasvuteorian alaan. Väitöskirjassani yleistän ”pool of knowledge” -tyyppisen endogeenisen kasvumallin tilanteeseen, jossa patentoitavissa olevalla innovaatiolla on minimikoko, ja jossa uudenlaisen tuotteen patentoinut yritys voi menettää monopolinsa tuotteeseen jäljittelyn johdosta. Mallin kontekstissa voidaan analysoida jäljittelyn ja innovaatioilta vaaditun ”minimikoon” vaikutuksia hyvinvointiin ja talouskasvuun. Kasvun maksimoiva imitaation määrä on mallissa aina nolla, mutta hyvinvoinnin maksimoiva imitaation määrä voi olla positiivinen. Talouskasvun ja hyvinvoinnin maksimoivalla patentoitavissa olevan innovaation ”minimikoolla” voi olla mikä tahansa teoreettista maksimia pienempi arvo. Väitöskirjani kahdessa jälkimmäisessä pääluvussa tarkastelen informaatiohyödykkeiden kaupallista piratismia mikrotaloustieteellisen mallin avulla. Informaatiohyödykkeistä laittomasti tehtyjen kopioiden tuotantokustannukset ovat pienet, ja miltei olemattomat silloin kun niitä levitetään esimerkiksi Internetissä. Koska piraattikopioilla on monta eri tuottajaa, niiden hinnan voitaisiin mikrotaloustieteen teorian perusteella olettaa laskevan melkein nollaan, ja jos näin kävisi, kaupallinen piratismi olisi mahdotonta. Mallissani selitän kaupallisen piratismin olemassaolon olettamalla, että piratismista saatavan rangaistuksen uhka riippuu siitä, kuinka monille kuluttajille piraatti tarjoaa laittomia hyödykkeitä, ja että se siksi vaikuttaa piraattikopioiden markkinoihin mainonnan kustannuksen tavoin. Kaupallisten piraattien kiinteiden kustannusten lisääminen on mallissani aina tekijänoikeuksien haltijan etujen mukaista, mutta ”mainonnan kustannuksen” lisääminen ei välttämättä ole, vaan se saattaa myös alentaa laillisten kopioiden myynnistä saatavia voittoja. Tämä tulos poikkeaa vastaavista aiemmista tuloksista sikäli, että se pätee vaikka tarkasteltuihin informaatiohyödykkeisiin ei liittyisi verkkovaikutuksia. Aiemmin ei-kaupallisen piratismin malleista on usein johdettu tulos, jonka mukaan informaatiohyödykkeen laittomat kopiot voivat kasvattaa laillisten kopioiden myynnistä saatavia voittoja jos laillisten kopioiden arvo niiden käyttäjille riippuu siitä, kuinka monet muut kuluttajat käyttävät samanlaista hyödykettä ja jos piraattikopioiden saatavuus lisää riittävästi laillisten kopioiden arvoa. Väitöskirjan viimeisessä pääluvussa yleistän mallini verkkotoimialoille, ja tutkin yleistämäni mallin avulla sitä, missä tapauksissa vastaava tulos pätee myös kaupalliseen piratismiin.

Assessing the significance of climate and community factors on urban water demand

Ensuring adequate water supply to urban areas is a challenging task due to factors such as rapid urban growth, increasing water demand and climate change. In developing a sustainable water supply system, it is important to identify the dominant water demand factors for any given water supply scheme. This paper applies principal components analysis to identify the factors that dominate residential water demand using the Blue Mountains Water Supply System in Australia as a case study. The results show that the influence of community intervention factors (e.g. use of water efficient appliances and rainwater tanks) on water demand are among the most significant. The result also confirmed that the community intervention programmes and water pricing policy together can play a noticeable role in reducing the overall water demand. On the other hand, the influence of rainfall on water demand is found to be very limited, while temperature shows some degree of correlation with water demand. The results of this study would help water authorities to plan for effective water demand management strategies and to develop a water demand forecasting model with appropriate climatic factors to achieve sustainable water resources management. The methodology developed in this paper can be adapted to other water supply systems to identify the influential factors in water demand modelling and to devise an effective demand management strategy.

A model for determining the optimal project life span and concession period of BOT projects

The concession agreement is the core feature of BOT projects, with the concession period being the most essential feature in determining the time span of the various rights, obligations and responsibilities of the government and concessionaire. Concession period design is therefore crucial for financial viability and determining the benefit/cost allocation between the host government and the concessionaire. However, while the concession period and project life span are essentially interdependent, most methods to date consider their determination as contiguous events that are determined exogenously. Moreover, these methods seldom consider the, often uncertain, social benefits and costs involved that are critical in defining, pricing and distributing benefits and costs between the various parties and evaluating potentially distributable cash flows. In this paper, we present the results of the first stage of a research project aimed at determining the optimal build-operate-transfer (BOT) project life span and concession period endogenously and interdependently by maximizing the combined benefits of stakeholders. Based on the estimation of the economic and social development involved, a negotiation space of the concession period interval is obtained, with its lower boundary creating the desired financial return for the private investors and its upper boundary ensuring the economic feasibility of the host government as well as the maximized welfare within the project life. The outcome of the new quantitative model is considered as a suitable basis for future field trials prior to implementation. The structure and details of the model are provided in the paper with Hong Kong tunnel project as a case study to demonstrate its detailed application. The basic contributions of the paper to the theory of construction procurement are that the project life span and concession period are determined jointly and the social benefits taken into account in the examination of project financial benefits. In practical terms, the model goes beyond the current practice of linear-process thinking and should enable engineering consultants to provide project information more rationally and accurately to BOT project bidders and increase the government's prospects of successfully entering into a contract with a concessionaire. This is expected to generate more negotiation space for the government and concessionaire in determining the major socioeconomic features of individual BOT contracts when negotiating the concession period. As a result, the use of the model should increase the total benefit to both parties.

Company taxation and tax spillovers: Separate accounting versus formula apportionment

It is observed in the real world that taxes matter for location decisions and that multinationals shift profits by transfer pricing. The US and Canada use so-called formula apportionment (FA) to tax corporate income, and the EU is debating a switch from separate accounting (SA) to FA. This paper develops a theoretical model that compares basic properties of FA to SA. The focal point of the analysis is how changes in tax rates affect capital formation, input choice, and transfer pricing, as well as on spillovers on tax revenue in other countries. The analysis shows that a move from SA to FA will not eliminate such spillovers and will, in cases identified in the paper, actually aggravate them.

Multiple roles of transfer prices: One vs. two books

This paper investigates multiple roles of transfer prices for shipments of goods and services between entities of a multinational enterprise. At the center is the role of transfer pricing (TP) in tax manipulation, but other roles having to do with internal operations or strategic delegation, etc. are also considered. The interesting question is to what extent and how the different roles of TPs interfere with each other. The answer depends on whether companies use one or two books, i.e. whether they (can) apply different TPs for different purposes. We illustrate, in a stylized model, the competing aims of tax manipulation and strategic delegation. Finally, we briefly look at selected reform proposals, concluding that either TP problems are not addressed, or else new distortions will be introduced instead.

Universalization of access to modern energy services in Indian households-Economic and policy analysis

Provision of modern energy services for cooking (with gaseous fuels)and lighting (with electricity) is an essential component of any policy aiming to address health, education or welfare issues; yet it gets little attention from policy-makers. Secure, adequate, low-cost energy of quality and convenience is core to the delivery of these services. The present study analyses the energy consumption pattern of Indian domestic sector and examines the urban-rural divide and income energy linkage. A comprehensive analysis is done to estimate the cost for providing modern energy services to everyone by 2030. A public-private partnership-driven business model, with entrepreneurship at the core, is developed with institutional, financing and pricing mechanisms for diffusion of energy services. This approach, termed as EMPOWERS (entrepreneurship model for provision of wholesome energy-related basic services), if adopted, can facilitate large-scale dissemination of energy-efficient and renewable technologies like small-scale biogas/biofuel plants, and distributed power generation technologies to provide clean, safe, reliable and sustainable energy to rural households and urban poor. It is expected to integrate the processes of market transformation and entrepreneurship development involving government, NGOs, financial institutions and community groups as stakeholders. (C) 2009 Elsevier Ltd. All rights reserved.

Uplink Power Control and Base Station Association in Multichannel Cellular Networks

A combined base station association and power control problem is studied for the uplink of multichannel multicell cellular networks, in which each channel is used by exactly one cell (i.e., base station). A distributed association and power update algorithm is proposed and shown to converge to a Nash equilibrium of a noncooperative game. We consider network models with discrete mobiles (yielding an atomic congestion game), as well as a continuum of mobiles (yielding a population game). We find that the equilibria need not be Pareto efficient, nor need they be system optimal. To address the lack of system optimality, we propose pricing mechanisms. It is shown that these mechanisms can be implemented in a distributed fashion.

The effects of the 2004 reduction in the price of alcohol on alcohol-related harm in Finland : A natural experiment based on register data

Changes in alcohol pricing have been documented as inversely associated with changes in consumption and alcohol-related problems. Evidence of the association between price changes and health problems is nevertheless patchy and is based to a large extent on cross-sectional state-level data, or time series of such cross-sectional analyses. Natural experimental studies have been called for. There was a substantial reduction in the price of alcohol in Finland in 2004 due to a reduction in alcohol taxes of one third, on average, and the abolition of duty-free allowances for travellers from the EU. These changes in the Finnish alcohol policy could be considered a natural experiment, which offered a good opportunity to study what happens with regard to alcohol-related problems when prices go down. The present study investigated the effects of this reduction in alcohol prices on (1) alcohol-related and all-cause mortality, and mortality due to cardiovascular diseases, (2) alcohol-related morbidity in terms of hospitalisation, (3) socioeconomic differentials in alcohol-related mortality, and (4) small-area differences in interpersonal violence in the Helsinki Metropolitan area. Differential trends in alcohol-related mortality prior to the price reduction were also analysed. A variety of population-based register data was used in the study. Time-series intervention analysis modelling was applied to monthly aggregations of deaths and hospitalisation for the period 1996-2006. These and other mortality analyses were carried out for men and women aged 15 years and over. Socioeconomic differentials in alcohol-related mortality were assessed on a before/after basis, mortality being followed up in 2001-2003 (before the price reduction) and 2004-2005 (after). Alcohol-related mortality was defined in all the studies on mortality on the basis of information on both underlying and contributory causes of death. Hospitalisation related to alcohol meant that there was a reference to alcohol in the primary diagnosis. Data on interpersonal violence was gathered from 86 administrative small-areas in the Helsinki Metropolitan area and was also assessed on a before/after basis followed up in 2002-2003 and 2004-2005. The statistical methods employed to analyse these data sets included time-series analysis, and Poisson and linear regression. The results of the study indicate that alcohol-related deaths increased substantially among men aged 40-69 years and among women aged 50-69 after the price reduction when trends and seasonal variation were taken into account. The increase was mainly attributable to chronic causes, particularly liver diseases. Mortality due to cardiovascular diseases and all-cause mortality, on the other hand, decreased considerably among the-over-69-year-olds. The increase in alcohol-related mortality in absolute terms among the 30-59-year-olds was largest among the unemployed and early-age pensioners, and those with a low level of education, social class or income. The relative differences in change between the education and social class subgroups were small. The employed and those under the age of 35 did not suffer from increased alcohol-related mortality in the two years following the price reduction. The gap between the age and education groups, which was substantial in the 1980s, thus further broadened. With regard to alcohol-related hospitalisation, there was an increase in both chronic and acute causes among men under the age of 70, and among women in the 50-69-year age group when trends and seasonal variation were taken into account. Alcohol dependence and other alcohol-related mental and behavioural disorders were the largest category in both the total number of chronic hospitalisation and in the increase. There was no increase in the rate of interpersonal violence in the Helsinki Metropolitan area, and even a decrease in domestic violence. There was a significant relationship between the measures of social disadvantage on the area level and interpersonal violence, although the differences in the effects of the price reduction between the different areas were small. The findings of the present study suggest that that a reduction in alcohol prices may lead to a substantial increase in alcohol-related mortality and morbidity. However, large population group differences were observed regarding responsiveness to the price changes. In particular, the less privileged, such as the unemployed, were most sensitive. In contrast, at least in the Finnish context, the younger generations and the employed do not appear to be adversely affected, and those in the older age groups may even benefit from cheaper alcohol in terms of decreased rates of CVD mortality. The results also suggest that reductions in alcohol prices do not necessarily affect interpersonal violence. The population group differences in the effects of the price changes on alcohol-related harm should be acknowledged, and therefore the policy actions should focus on the population subgroups that are primarily responsive to the price reduction.

Predicting price-tag for customized goods

We discuss a dynamic pricing model which will aid automobile manufacturer in choosing the right price for customer segment. Though there is oligopoly market structure, the customers get "locked" into a particular technology/company which virtually makes the situation akin to a monopoly. There are associated network externalities and positive feedback. The key idea in monopoly pricing lies in extracting the customer surplus by exploiting the respective elasticities of demand. We present a Walrasian general equilibrium approach to determine the segment price. We compare the prices obtained from optimization model with that from Walrasian dynamics. The results are encouraging and can serve as a critical factor in Customer Relationship Management (CRM) and thereby effectively manage the lock-in.

Essays on Market Microstructure: Price Discovery and Informed Trading

Market microstructure is “the study of the trading mechanisms used for financial securities” (Hasbrouck (2007)). It seeks to understand the sources of value and reasons for trade, in a setting with different types of traders, and different private and public information sets. The actual mechanisms of trade are a continually changing object of study. These include continuous markets, auctions, limit order books, dealer markets, or combinations of these operating as a hybrid market. Microstructure also has to allow for the possibility of multiple prices. At any given time an investor may be faced with a multitude of different prices, depending on whether he or she is buying or selling, the quantity he or she wishes to trade, and the required speed for the trade. The price may also depend on the relationship that the trader has with potential counterparties. In this research, I touch upon all of the above issues. I do this by studying three specific areas, all of which have both practical and policy implications. First, I study the role of information in trading and pricing securities in markets with a heterogeneous population of traders, some of whom are informed and some not, and who trade for different private or public reasons. Second, I study the price discovery of stocks in a setting where they are simultaneously traded in more than one market. Third, I make a contribution to the ongoing discussion about market design, i.e. the question of which trading systems and ways of organizing trading are most efficient. A common characteristic throughout my thesis is the use of high frequency datasets, i.e. tick data. These datasets include all trades and quotes in a given security, rather than just the daily closing prices, as in traditional asset pricing literature. This thesis consists of four separate essays. In the first essay I study price discovery for European companies cross-listed in the United States. I also study explanatory variables for differences in price discovery. In my second essay I contribute to earlier research on two issues of broad interest in market microstructure: market transparency and informed trading. I examine the effects of a change to an anonymous market at the OMX Helsinki Stock Exchange. I broaden my focus slightly in the third essay, to include releases of macroeconomic data in the United States. I analyze the effect of these releases on European cross-listed stocks. The fourth and last essay examines the uses of standard methodologies of price discovery analysis in a novel way. Specifically, I study price discovery within one market, between local and foreign traders.

Essays on the Linkages Between Financial Markets, and Risk Asymmetries (summary section only)

During the last few decades there have been far going financial market deregulation, technical development, advances in information technology, and standardization of legislation between countries. As a result, one can expect that financial markets have grown more interlinked. The proper understanding of the cross-market linkages has implications for investment and risk management, diversification, asset pricing, and regulation. The purpose of this research is to assess the degree of price, return, and volatility linkages between both geographic markets and asset categories within one country, Finland. Another purpose is to analyze risk asymmetries, i.e., the tendency of equity risk to be higher after negative events than after positive events of equal magnitude. The analysis is conducted both with respect to total risk (volatility), and systematic risk (beta). The thesis consists of an introductory part and four essays. The first essay studies to which extent international stock prices comove. The degree of comovements is low, indicating benefits from international diversification. The second essay examines the degree to which the Finnish market is linked to the “world market”. The total risk is divided into two parts, one relating to world factors, and one relating to domestic factors. The impact of world factors has increased over time. After 1993, when foreign investors were allowed to freely invest in Finnish assets, the risk level has been higher than previously. This was also the case during the economic recession in the beginning of the 1990’s. The third essay focuses on the stock, bond, and money markets in Finland. According to a trading model, the degree of volatility linkages should be strong. However, the results contradict this. The linkages are surprisingly weak, even negative. The stock market is the most independent, while the money market is affected by events on the two other markets. The fourth essay concentrates on volatility and beta asymmetries. Contrary to many international studies there are only few cases of risk asymmetries. When they occur, they tend to be driven by the market-wide component rather than the portfolio specific element.

Essays on Risk and Return

Perhaps the most fundamental prediction of financial theory is that the expected returns on financial assets are determined by the amount of risk contained in their payoffs. Assets with a riskier payoff pattern should provide higher expected returns than assets that are otherwise similar but provide payoffs that contain less risk. Financial theory also predicts that not all types of risks should be compensated with higher expected returns. It is well-known that the asset-specific risk can be diversified away, whereas the systematic component of risk that affects all assets remains even in large portfolios. Thus, the asset-specific risk that the investor can easily get rid of by diversification should not lead to higher expected returns, and only the shared movement of individual asset returns – the sensitivity of these assets to a set of systematic risk factors – should matter for asset pricing. It is within this framework that this thesis is situated. The first essay proposes a new systematic risk factor, hypothesized to be correlated with changes in investor risk aversion, which manages to explain a large fraction of the return variation in the cross-section of stock returns. The second and third essays investigate the pricing of asset-specific risk, uncorrelated with commonly used risk factors, in the cross-section of stock returns. The three essays mentioned above use stock market data from the U.S. The fourth essay presents a new total return stock market index for the Finnish stock market beginning from the opening of the Helsinki Stock Exchange in 1912 and ending in 1969 when other total return indices become available. Because a total return stock market index for the period prior to 1970 has not been available before, academics and stock market participants have not known the historical return that stock market investors in Finland could have achieved on their investments. The new stock market index presented in essay 4 makes it possible, for the first time, to calculate the historical average return on the Finnish stock market and to conduct further studies that require long time-series of data.