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Forecasting the European Carbon Market
Get PDFIn an effort to meet its obligations under the Kyoto Protocol, in 2005 the European Union introduced a cap-and-trade scheme where
mandated installations are allocated permits to emit CO2. Financial markets have developed that allow companies to trade these carbon permits. For the EU to achieve reductions in CO2 emissions at a minimum cost, it is necessary that companies make appropriate investments and policymakers design optimal policies. In an effort to clarify the workings of the carbon market, several recent papers have attempted to statistically model it. However, the European carbon market (EU ETS) has many institutional features that potentially impact on daily carbon prices (and associated nancial futures). As a consequence, the carbon market has properties that are quite different from conventional financial assets traded in mature markets. In this paper, we use dynamic model averaging (DMA) in order to forecast in this newly-developing market. DMA
is a recently-developed statistical method which has three advantages over conventional approaches. First, it allows the coefficients on the predictors in a
forecasting model to change over time. Second, it allows for the entire fore-
casting model to change over time. Third, it surmounts statistical problems which arise from the large number of potential predictors that can explain carbon prices. Our empirical results indicate that there are both important policy and statistical bene ts with our approach. Statistically, we present strong evidence that there is substantial turbulence and change in the EU ETS market, and that DMA can model these features and forecast accurately compared to
conventional approaches. From a policy perspective, we discuss the relative and
changing role of different price drivers in the EU ETS. Finally, we document
the forecast performance of DMA and discuss how this relates to the efficiency
and maturity of this market
Modelling Breaks and Clusters in the Steady States of Macroeconomic Variables
Get PDFMacroeconomists working with multivariate models typically face uncertainty over which (if any) of their variables have long run steady states which are subject to breaks. Furthermore, the nature of the break process is often unknown. In this paper, we draw on methods from the Bayesian clustering literature to develop an econometric
methodology which: i) finds groups of variables which have the same
number of breaks; and ii) determines the nature of the break process within each group. We present an application involving a five-variate steady-state VAR
Forecasting Inflation Using Dynamic Model Averaging
Get PDFWe forecast quarterly US inflation based on the generalized Phillips curve using
econometric methods which incorporate dynamic model averaging. These methods
not only allow for coe¢ cients to change over time, but also allow for the entire
forecasting model to change over time. We nd that dynamic model averaging leads
to substantial forecasting improvements over simple benchmark regressions and more
sophisticated approaches such as those using time varying coe¢ cient models. We
also provide evidence on which sets of predictors are relevant for forecasting in each period
What drives urban consumption in mainland china? The role of property price dynamics
Get PDFThis paper adds to the literature on wealth effects on consumption by disentangling house price effects on consumption for mainland China. In a stochastic modelling framework, the riskiness, rate of
increase and persistence of house price movements have different implications for the
consumption/housing ratio. We exploit the geographical variation in property prices by using a quarterly city-level panel dataset for the period 1998Q1 – 2009Q4 and rely on a panel error correction model. Overall, the results suggest a significant long run impact of property prices on consumption.
They also broadly confirm the predictions from the theoretical model
Transmission of macro-liquidity shocks to liquidity-sorted stock portfolios’ returns: The role of the financial crisis
Get PDFThis study examines the impact of macro-liquidity shocks on the returns of UK stock
portfolios sorted on the basis of a series of micro-liquidity measures. The macro-liquidity shocks are extracted on the meeting days of the Bank of England Monetary Policy Committee relative to market expectations embedded in futures contracts on the 3-month LIBOR during the period June 1999- December 2009. We report definitive evidence that these shocks are transmitted to the cross-section of liquidity-sorted portfolios, with most liquid stocks playing
a very active role. Our results emphatically document that the shocks-returns relationship has reversed its sign during the recent financial crisis; the standard inverse relationship between
interest rate surprises and portfolios’ returns before the crisis has turned into positive during the crisis. This finding confirms the inability of interest rate cuts to boost returns in the shortrun
during the crisis, because these were perceived by market participants as a signal of a deteriorating economic outlook
Rebound Effects from Increased Efficiency in the Use of Energy by UK Households
Get PDFIn this paper, we use CGE modelling techniques to identify the impact on energy use of an improvement in energy efficiency in the household sector. The main findings are that 1) when the price of energy is measured in natural units, the increase in efficiency yields only to a modification
of tastes, changing as a result, the composition of household consumption; 2) when households internalize efficiency, the improvement in energy efficiency reduces the price of energy in efficiency units, providing a source of improved competitiveness as the nominal wage and the price level both fall; 3) the short-run rebound can be greater than the long run rebound if the household demand elasticity is the same for both time frames, however, the short run rebound is always lower
than in the long-run if the demand for energy is relatively more elastic in the long-run; 4) the introduction of habit formation changes the composition of household consumption, modifying the
magnitude of the household rebound only in the short-run. In this period, household and economy wide rebound are lowest for external habit formation and highest when consumers’ preferences are defined using a conventional utility function
When Do We Learn to Cooperate? The Role of Social Learning in Social Dilemmas
Get PDFIn this paper, I look at the interaction between social learning and cooperative behavior. I model this using a social dilemma game with publicly observed
sequential actions and asymmetric information about pay offs. I find that some
informed agents in this model act, individually and without collusion, to conceal the privately optimal action. Because the privately optimal action is socially costly the behavior of informed agents can lead to a Pareto improvement in a social dilemma. In my model I show that it is possible to get cooperative behavior
if information is restricted to a small but non-zero proportion of the population.
Moreover, such cooperative behavior occurs in a finite setting where it is public
knowledge which agent will act last. The proportion of cooperative agents within
the population can be made arbitrarily close to 1 by increasing the finite number
of agents playing the game. Finally, I show that under a broad set of conditions
that it is a Pareto improvement on a corner value, in the ex-ante welfare sense,
for an interior proportion of the population to be informed
How Heavy Is A Job?: A Critical Survey of Job Evaluation as a Payment Device.
Get PDFWith salaries subjected to scrutiny more than ever, it is increasingly important that the process by which they are determined be understood and justifiable. Both public and private organisations now routinely rely on so-called “job evaluation” as a means of constructing an appropriate pay-scale and as such it is ever more necessary that we appreciate how this system works and that we recognise its limits. Only with such an understanding of the way in which salaries are set can we hope to have a meaningful discussion of their economic function. This paper aims to expound the details of job evaluation both in theory and in
practice, and critically assess its shortcomings. In Section 1 below we describe the job evaluation system and in Section 2 we briefly outline the history and the usage of the system in both the private and the public sector. In Section 3 we theoretically analyse the often unstated but nonetheless implicit assumptions made by practitioners of the art of job evaluation. Section 4 applies the analysis of Section 3 to review a particular and important case study, namely The Senior Salaries Review of the Welsh Assembly 2004. Section 5 concludes
Measuring the Economic Significance of Structural Exchange Rate Models
Get PDFThis paper examines both the in-sample and out-of-sample performance of three monetary
fundamental models of exchange rates and compares their out-of-sample performance to that of a simple Random Walk model. Using a data-set consisting of five currencies at monthly frequency over the period January 1980 to December 2009 and a battery of newly developed performance measures, the paper shows that monetary models do better (in-sample and out-of-sample forecasting) than a simple Random Walk model
Marriage as a Rat Race: Noisy Pre-Marital Investments with Assortative Matching
Get PDFWe study the incentive to invest to improve marriage prospects, in a frictionless
marriage market with non-transferable utility. Stochastic returns to investment
eliminate the multiplicity of equilibria in models with deterministic returns,
and a unique equilibrium exists under reasonable conditions. Equilibrium investment
is efficient when the sexes are symmetric. However, when there is any asymmetry,
including an unbalanced sex ratio, investments are generically excessive.
For example, if there is an excess of boys, then there is parental over-investment
in boys and under-investment in girls, and total investment will be excessive