Essays on emissions trading markets

This dissertation is a collection of three economics essays on different aspects of carbon emission trading markets. The first essay analyzes the dynamic optimal emission control strategies of two nations. With a potential to become the largest buyer under the Kyoto Protocol, the US is assumed to be a monopsony, whereas with a large number of tradable permits on hand Russia is assumed to be a monopoly. Optimal costs of emission control programs are estimated for both the countries under four different market scenarios: non-cooperative no trade, US monopsony, Russia monopoly, and cooperative trading. The US monopsony scenario is found to be the most Pareto cost efficient. The Pareto efficient outcome, however, would require the US to make side payments to Russia, which will even out the differences in the cost savings from cooperative behavior. The second essay analyzes the price dynamics of the Chicago Climate Exchange (CCX), a voluntary emissions trading market. By examining the volatility in market returns using AR-GARCH and Markov switching models, the study associates the market price fluctuations with two different political regimes of the US government. Further, the study also identifies a high volatility in the returns few months before the market collapse. Three possible regulatory and market-based forces are identified as probable causes of market volatility and its ultimate collapse. Organizers of other voluntary markets in the US and worldwide may closely watch for these regime switching forces in order to overcome emission market crashes. The third essay compares excess skewness and kurtosis in carbon prices between CCX and EU ETS (European Union Emission Trading Scheme) Phase I and II markets, by examining the tail behavior when market expectations exceed the threshold level. Dynamic extreme value theory is used to find out the mean price exceedence of the threshold levels and estimate the risk loss. The calculated risk measures suggest that CCX and EU ETS Phase I are extremely immature markets for a risk investor, whereas EU ETS Phase II is a more stable market that could develop as a mature carbon market in future years.

Essays on Emissions Trading Markets

This dissertation is a collection of three economics essays on different aspects of carbon emission trading markets. The first essay analyzes the dynamic optimal emission control strategies of two nations. With a potential to become the largest buyer under the Kyoto Protocol, the US is assumed to be a monopsony, whereas with a large number of tradable permits on hand Russia is assumed to be a monopoly. Optimal costs of emission control programs are estimated for both the countries under four different market scenarios: non-cooperative no trade, US monopsony, Russia monopoly, and cooperative trading. The US monopsony scenario is found to be the most Pareto cost efficient. The Pareto efficient outcome, however, would require the US to make side payments to Russia, which will even out the differences in the cost savings from cooperative behavior. The second essay analyzes the price dynamics of the Chicago Climate Exchange (CCX), a voluntary emissions trading market. By examining the volatility in market returns using AR-GARCH and Markov switching models, the study associates the market price fluctuations with two different political regimes of the US government. Further, the study also identifies a high volatility in the returns few months before the market collapse. Three possible regulatory and market-based forces are identified as probable causes of market volatility and its ultimate collapse. Organizers of other voluntary markets in the US and worldwide may closely watch for these regime switching forces in order to overcome emission market crashes. The third essay compares excess skewness and kurtosis in carbon prices between CCX and EU ETS (European Union Emission Trading Scheme) Phase I and II markets, by examining the tail behavior when market expectations exceed the threshold level. Dynamic extreme value theory is used to find out the mean price exceedence of the threshold levels and estimate the risk loss. The calculated risk measures suggest that CCX and EU ETS Phase I are extremely immature markets for a risk investor, whereas EU ETS Phase II is a more stable market that could develop as a mature carbon market in future years.

A stochastic dynamic programming approach for pricing options on stock-index futures

The aim of this thesis is to price options on equity index futures with an application to standard options on S&P 500 futures traded on the Chicago Mercantile Exchange. Our methodology is based on stochastic dynamic programming, which can accommodate European as well as American options. The model accommodates dividends from the underlying asset. It also captures the optimal exercise strategy and the fair value of the option. This approach is an alternative to available numerical pricing methods such as binomial trees, finite differences, and ad-hoc numerical approximation techniques. Our numerical and empirical investigations demonstrate convergence, robustness, and efficiency. We use this methodology to value exchange-listed options. The European option premiums thus obtained are compared to Black's closed-form formula. They are accurate to four digits. The American option premiums also have a similar level of accuracy compared to premiums obtained using finite differences and binomial trees with a large number of time steps. The proposed model accounts for deterministic, seasonally varying dividend yield. In pricing futures options, we discover that what matters is the sum of the dividend yields over the life of the futures contract and not their distribution.

Overview of the West African monsoon 2011

Although the 2011 West African monsoon (WAM) season was, overall, near normal, rainfall was patchy. The irregularity of the rainfall during the crucial July-August-September (JAS) season proved difficult to predict - highlighting the significant challenges we continue to face for this region. The vagaries of the rainfall in sub-Saharan Africa have profound and often dire effects on African society and economy. To reduce the vulnerability of African communities to variations in the strength of the WAM, the scientific community needs to improve the reliability of forecasts so as to enable forward planning, and national governments need to adopt coordinated policies in order to increase their capacity to cope with extended periods of water shortages due to drought. With the launch of the Africa Climate Exchange (Afclix), the UK and African climate communies are working with both the humanitarian sector and policy-makers to channel the latest climate science into policy. Such policies have the potential to build resilience and in-country capacity for climate compatible development in sub-Saharan Africa. The emphasis is on ‘feet on the (African) ground’ mechanisms of knowledge-sharing activities at the science-policy interface.

Building resilience in the face of recurring environmental crisis in African Sahel

The present food shortages in the Horn of Africa and the West African Sahel are affecting 31 million people. Such continuing and future crises require that people in the region adapt to an increasing and potentially irreversible global sustainability challenge. Given this situation and that short-term weather and seasonal climate forecasting have limited skill for West Africa, the Rainwatch project illustrates the value of near real-time monitoring and improved communication for the unfavourable 2011 West African monsoon, the resulting severe drought-induced humanitarian impacts continuing into 2012, and their exacerbation by flooding in 2012. Rainwatch is now coupled with a boundary organization (Africa Climate Exchange, AfClix) with the aim of integrating the expertise and actions of relevant institutions, agencies and stakeholders to broker ground-based dialogue to promote resilience in the face of recurring crisis.

Santa Fe magazine.

Mode of access: Internet.

Three essays on market depth in futures markets

Liquidity is an important market characteristic for participants in every financial market. One of the three components of liquidity is market depth. Prior literature lacks a comprehensive analysis of depth in U.S. futures markets due to past limitations on the availability of data. However, recent innovations in data collection and dissemination provide new opportunities to investigate the depth dimension of liquidity. In this dissertation, the Chicago Mercantile Exchange (CME) Group proprietary database on depth is employed to study the dynamics of depth in the U.S. futures markets. This database allows for the analysis of depth along the entire limit order book rather than just at the first level. The first essay examines the characteristics of depth within the context of the five-deep limit order book. Results show that a large amount of depth is present in the book beyond the best level. Furthermore, the findings show that the characteristics of five-deep depth between day and night trading vary and that depth is unequal across levels within the limit order book. The second essay examines the link between the five-deep market depth and the bid-ask spread. The results suggest an inverse relation between the spread and the depth after adjusting for control factors. The third essay explores transitory volatility in relation to depth in the limit order book. Evidence supports the relation between an increase in volatility and a subsequent decrease in market depth. Overall, the results of this dissertation are consistent with limit order traders actively managing depth along the limit order book in electronic U.S. futures markets.

Three Essays on Market Depth in Futures Markets

Liquidity is an important market characteristic for participants in every financial market. One of the three components of liquidity is market depth. Prior literature lacks a comprehensive analysis of depth in U.S. futures markets due to past limitations on the availability of data. However, recent innovations in data collection and dissemination provide new opportunities to investigate the depth dimension of liquidity. In this dissertation, the Chicago Mercantile Exchange (CME) Group proprietary database on depth is employed to study the dynamics of depth in the U.S. futures markets. This database allows for the analysis of depth along the entire limit order book rather than just at the first level. The first essay examines the characteristics of depth within the context of the five-deep limit order book. Results show that a large amount of depth is present in the book beyond the best level. Furthermore, the findings show that the characteristics of five-deep depth between day and night trading vary and that depth is unequal across levels within the limit order book. The second essay examines the link between the five-deep market depth and the bid-ask spread. The results suggest an inverse relation between the spread and the depth after adjusting for control factors. The third essay explores transitory volatility in relation to depth in the limit order book. Evidence supports the relation between an increase in volatility and a subsequent decrease in market depth. Overall, the results of this dissertation are consistent with limit order traders actively managing depth along the limit order book in electronic U.S. futures markets.

Land-atmosphere energy exchange in Arctic tundra and boreal forest: available data and feedbacks to climate

This paper summarizes and analyses available data on the surface energy balance of Arctic tundra and boreal forest. The complex interactions between ecosystems and their surface energy balance are also examined, including climatically induced shifts in ecosystem type that might amplify or reduce the effects of potential climatic change. High latitudes are characterized by large annual changes in solar input. Albedo decreases strongly from winter, when the surface is snow-covered, to summer, especially in nonforested regions such as Arctic tundra and boreal wetlands. Evapotranspiration (QE) of high-latitude ecosystems is less than from a freely evaporating surface and decreases late in the season, when soil moisture declines, indicating stomatal control over QE, particularly in evergreen forests. Evergreen conifer forests have a canopy conductance half that of deciduous forests and consequently lower QE and higher sensible heat flux (QH). There is a broad overlap in energy partitioning between Arctic and boreal ecosystems, although Arctic ecosystems and light taiga generally have higher ground heat flux because there is less leaf and stem area to shade the ground surface, and the thermal gradient from the surface to permafrost is steeper. Permafrost creates a strong heat sink in summer that reduces surface temperature and therefore heat flux to the atmosphere. Loss of permafrost would therefore amplify climatic warming. If warming caused an increase in productivity and leaf area, or fire caused a shift from evergreen to deciduous forest, this would increase QE and reduce QH. Potential future shifts in vegetation would have varying climate feedbacks, with largest effects caused by shifts from boreal conifer to shrubland or deciduous forest (or vice versa) and from Arctic coastal to wet tundra. An increase of logging activity in the boreal forests appears to reduce QE by roughly 50% with little change in QH, while the ground heat flux is strongly enhanced.

The weather and climate of Chicago,

Mode of access: Internet.

A multilevel analysis of team climate and interpersonal exchange relationships at work

This study advances research on interpersonal exchange relationships by integrating social exchange, workplace friendship and climate research to develop a multilevel model. Data were collected from 215 manager-employee dyads working within 36 teams. At the individual level, LMX was positively associated with TMX and workplace friendship. Further, workplace friendship was positively related to TMX, and mediated the LMX-TMX relationship. At the team level, HLM results demonstrated that the relationship between LMX and workplace friendship was moderated by affective climate. Findings suggest that high-quality LMX relationships are associated with enhanced employees' perceptions of workplace friendship when affective group climate was strong.