Martina Linnenluecke, Tom Smith and Robert E. Whaley
This paper aims to examine the complex issue of the social cost of carbon. The authors review the existing literature and the strengths and deficiencies of existing approaches…
Abstract
Purpose
This paper aims to examine the complex issue of the social cost of carbon. The authors review the existing literature and the strengths and deficiencies of existing approaches. They introduce a simple methodology that estimates the amount of “legal looting” in the fossil fuel industry as an alternative approach to calculate an unpaid social cost of carbon. The “looting amount” can be defined as society’s failure to charge fossil fuel firms for the damage that their activities cause represents an implied subsidy.
Design/methodology/approach
The methodology used in this paper combines decisions in the form of policymakers setting carbon taxes and rational investors investing in carbon emission markets.
Findings
The authors show that the unpaid social cost of carbon in the fossil fuel industry was US$12.7tn over 1995-2013, but may be as high as US$115.5tn.
Originality/value
Over the same period, the sum of industry profits, emission trading scheme carbon permit and carbon tax revenue totalled US$7tn, indicating the industry would not be viable if it was made to pay for damages to society.
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Philippe Bélanger and Marc-André Picard
Previous studies have shown the VIX futures tend to roll-down the term structure and converge towards the spot as they grow closer to maturity. The purpose of this paper is to…
Abstract
Purpose
Previous studies have shown the VIX futures tend to roll-down the term structure and converge towards the spot as they grow closer to maturity. The purpose of this paper is to propose an approach to improve the volatility index fear factor-level (VIX-level) prediction.
Design/methodology/approach
First, the authors use a forward-looking technique, the Heath–Jarrow–Morton (HJM) no-arbitrage framework to capture the convergence of the futures contract towards the spot. Second, the authors use principal component analysis (PCA) to reduce dimensionality and save substantial computational time. Third, the authors validate the model with selected VIX futures maturities and test on value-at-risk (VAR) computations.
Findings
The authors show that the use of multiple factors has a significant impact on the simulated VIX futures distribution, as well as the computations of their VAR (gain in accuracy and computing time). This impact becomes much more compelling when analysing a portfolio of VIX futures of multiple maturities.
Research limitations/implications
The authors’ approach assumes the variance to be stationary and ignores the volatility smile. Nevertheless, they offer suggestions for future research.
Practical implications
The VIX-level prediction (the fear factor) is of paramount importance for market makers and participants, as there is no way to replicate the underlying asset of VIX futures. The authors propose a procedure that provides efficiency to both pricing and risk management.
Originality/value
This paper is the first to apply a forward-looking method by way of a HJM framework combined with PCA to VIX-level prediction in a portfolio context.
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EDWARD A. DYL, H. DOUGLAS WITTE and LARRY R. GORMAN
We examine tick sizes, stock prices, and share turnover in eighteen stock markets in developed countries and find that differences in mandatory tick sizes explain a significant…
Abstract
We examine tick sizes, stock prices, and share turnover in eighteen stock markets in developed countries and find that differences in mandatory tick sizes explain a significant proportion of the variation in stock prices among markets, and that lower percentage tick sizes are not associated with higher turnover. We consider the implications of these findings for the recent decimalization of stock trading in the United States, and conclude that decimal trading is likely to result in lower stock prices (due to stock splits) with no substantial change in dollar trading volume.
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Donald R. Fraser, John C. Groth and Steven S. Byers
This paper examines and updates an earlier study of the liquidity of an extensive array of common stocks traded on NYSE/ASE/NML‐NASDAQ. It reports apparent variances in liquidity…
Abstract
This paper examines and updates an earlier study of the liquidity of an extensive array of common stocks traded on NYSE/ASE/NML‐NASDAQ. It reports apparent variances in liquidity due to trading location and other variables. The paper suggests causes for these differences.
Volatility has become a traded commodity, and the value of extricating the implied volatility for a given underlying asset’s market value from observed option premia has long been…
Abstract
Volatility has become a traded commodity, and the value of extricating the implied volatility for a given underlying asset’s market value from observed option premia has long been recognized. This contribution offers a least-squared error approach based on Standardized Options that offers the potential to overcome the well-known problem of “smiles and frowns.”
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In this time of rapidly increasing journal subscription costs and shrinking (or stable) acquisition budgets, it is imperative to acquire materials as effectively as possible. One…
Abstract
In this time of rapidly increasing journal subscription costs and shrinking (or stable) acquisition budgets, it is imperative to acquire materials as effectively as possible. One method of doing this is to use citation analysis of the scholarly literature as a guideline. Citation analysis is the analysis of the references from a set of documents (such as an analysis of all of the citations from five years of College & Research Libraries or of all citations from geology dissertations at a university). Information received from the analysis includes: languages of items cited, age of items cited (to calculate a half‐life for the field), and rate of self‐citations. Broadus reviewed citation analysis, its use, validity, and reliability. In the past, citation analysis has been used in collection development to decide on the suitability of specific items (both journals and monographs), such as mentioned in Buzzard and Whaley. The method introduced here is to use the percentage of publication formats cited in the research literature to serve as a guideline for acquisitions budget breakdowns, i.e., percentages allocated to monographs versus that allocated to other formats, for each discipline. The reasoning behind this is that an effective method of acquiring materials is to purchase the materials that the library's clients will use in the formats in which they will use them. The key assumption is that the citations in a scholar's paper reflect the literature the scholar used.
Surging global natural disasters provide incentive for risk-reducing policies and strategies. In this light, the African Union (AU) engaged a multi-stakeholder policy formulation…
Abstract
Surging global natural disasters provide incentive for risk-reducing policies and strategies. In this light, the African Union (AU) engaged a multi-stakeholder policy formulation process between 2002 and 2006, to develop a continent-wide disaster risk reduction (DRR) strategy. Drawing from secondary data, this chapter assesses the process and applies qualitative analysis instruments to critically assess the AU’s disaster policy. Linkages to the 2005 international Hyogo Framework for Action (HFA) are also highlighted. The analysis reveals that Africa’s policy formulation process was belated for over a decade, with respect to international expectations. The formulation process was however largely African owned and led, culminating in a strategy document that reflected African contextual reality at the time, and aligned well with HFA fundamental goals. The applied multi-stakeholder approach enhanced a spirit of participation across levels and was central to the largely successful policy formulation process. However, targeted policy outcomes were not explicit, and poorly formulated indicators marred short- and long-term policy evaluation. Based on these results, we conclude that the African-wide DRR policy formulation processes were belated but participatory, systematic and very successful. Belated policy formulation reflects an initial inertia on the African continent, justified by past negative policy experiences and the desire to succeed. A replication of this policy formulation approach in Africa is recommended, albeit exercising more caution on policy timing, the elaboration of better monitoring and evaluation instruments and criteria. Participation should further embrace modern, risk-free (anti-COVID-19-friendly) information and communication technologies.
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Using a GED-GARCH model to estimate monthly data from January 1990 to February 2022, we test whether gold acts as a hedge or safe haven asset in 10 countries. With a downturn of…
Abstract
Using a GED-GARCH model to estimate monthly data from January 1990 to February 2022, we test whether gold acts as a hedge or safe haven asset in 10 countries. With a downturn of the stock market, gold can be viewed as a hedge and safe haven asset in the G7 countries. In the case of inflation, gold acts as a hedge and safe haven asset in the United States, United Kingdom, Canada, China, and Indonesia. For currency depreciation, oil price shock, economic policy uncertainty, and US volatility spillover, evidence finds that gold acts as a hedge and safe haven for all countries.
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Izidin El Kalak and Robert Hudson
This study aims to examine the cross-market efficiency of the FTSE/MIB index options contracts traded on the Italian derivatives market (IDEM) during a period including the…
Abstract
Purpose
This study aims to examine the cross-market efficiency of the FTSE/MIB index options contracts traded on the Italian derivatives market (IDEM) during a period including the financial crisis between 1st October 2007 and 31st December 2012 using daily option prices.
Design/methodology/approach
Two fundamental no-arbitrage conditions were tested: the lower boundary condition (LBC) and the put–call parity (PCP) condition while taking into account the role of transaction costs in mitigating the number of violations reported. Ex post tests of LBC and PCP revealed a low incidence of mispricing in this market. Furthermore, to check the robustness of the results obtained by the ex post tests, ex ante tests were applied to PCP violations occurring within a one-day lag.
Findings
The results showed a significant drop in the number of profitable arbitrage strategies. The findings obtained from all these tests generally support the cross-market efficiency of the Italian index options market during the sample period, though some violations were occasionally reported. Overall, the number and monetary value of the violations reported declined during the post-financial crisis period compared to those during the financial crisis period.
Research limitations/implications
This study can be extended to test the relationships between arbitrage profitability and other factors such as the moneyness (in the money, out of the money, at the money) of options and the maturity of options. Options market efficiency tests can be conducted such as call and put spreads, box spreads and put/call convexities (butterfly spreads).
Originality/value
There are several factors that influenced the decision to test the Italian index options market. First, the limited number of studies conducted on this market. Second, the fact that the two main studies on this market are relatively old, which makes it interesting to test the efficiency of this market with respect to a new set of data, taking into account the introduction of the Euro and the impact of the recent financial crisis on this market and whether the market efficiency hypothesis holds during the period of crisis. Third, it is important to consider the effect of the new rules applied to this market.