Country and industry equity risk premia in the euro area: an intertemporal approach

This paper provides new evidence on the dynamics of equity risk premia in euro area stock markets across country and industry portfolios. We develop and estimate a conditional intertemporal CAPM where returns on aggregate euro area, country and industry portfolios depend on the market risk as well as on the risk that the investment opportunity set changes over time. Prices of risks are time-varying, according to a Kalman filter approach. We find that both market and intertemporal risks are significantly priced. When we include country and industry-specific risk factors they turn out to be not significantly priced for most industries, suggesting that euro area equity markets are well integrated. Overall, the analysis indicates that omitting the intertemporal factor leads to mispricing and misleading conclusions regarding the degree of financial integration across sectors and countries. JEL Classification: G12, F37, C32conditional asset pricing, financial integration, intertemporal risk, Kalman filter, multivariate GARCH

Industry Equilibrium with Outside Financing and Moral Hazard: Effects of Market Integration

In this paper we study industry equilibrium and the effects of integration under the assumptions that 1) firms must use outside financing and 2) they face a moral hazard problem due to the possibility of taking excessive risks. These are typical features of banking and insurance, for instance. We examine an industry equilibrium where firms choose not to take excessive risks and compare this with the equilibrium in industries that do not have a moral hazard problem. We show that, as markets integrate, competition intensifies and prices fall in both types of industry. In markets with moral hazard there are relatively more exits, a smaller fall in prices and, contrary to the other case, the market value of the industry increases.industry equilibrium; outside financing; risk-taking behaviour; market integration

Industry Risk Premia in Pakistan

Industry characteristics is one of the main factors that determines a firm’s business risk [Kale, Hakansson, and Platt (1991)], and a single information can affect more than one security price change, perhaps even the whole market. Lessard (1974, 1976) explains that industry plays an important role in explaining national market volatility. One of the reasons for stock index behaviour are attributed to industrial composition as some industries are internally more volatile than the other [Grinold, Rudd, and Stefek (1989)]. Moreover, some sectors show a high degree of global integration, for example, the finance sector [Roll (1992)]. Similarly, consumer goods, fuel and energy, and transportation sectors are extremely important for any country index. King (1966) suggests that if a significant difference in industry risk premia is observed, then we need to isolate the market risk premia and industry risk premia. He observed that the industry components of variance showed much less change from sub-period to sub-period. Significant differential impact of regulatory policy on cost of capital across various sectors was also observed [Isimbabi (1994); Prager (1989)]. The industry specific policies in Pakistan are observed either as a part of the reform package during 1988 and early 1990s, or as an additional policy measure to further boost the private investments in priority sectors. These policies included incentives for foreign investment through permission for repatriation of profits, the easing of investment and banking sector regulations and easy access to loans and tax exemptions on priority sectors like power, exports and agriculture based industries. In addition, the government encouraged equity participation to avoid instability through growing leverage.

International stock return comovements

We examine international stock return comovements using country-industry and country-style portfolios as the base portfolios. We first establish that parsimonious risk-based factor models capture the covariance structure of the data better than the popular Heston- ouwenhorst (1994) model. We then establish the following stylized facts regarding stock return comovements. First, we do not find evidence for an upward trend in return correlations, except for the European stock markets. Second, the increasing importance of industry factors relative to country factors was a short-lived, temporary phenomenon. JEL Classification: C52, G11, G12APT model, Comovements, correlation dynamics, Factor models, global market integration, industry country debate, international diversification

Industry Risk Premia in Pakistan

Industry characteristics is one of the main factors that determines a firm’s business risk [Kale, Hakansson, and Platt (1991)], and a single information can affect more than one security price change, perhaps even the whole market. Lessard (1974, 1976) explains that industry plays an important role in explaining national market volatility. One of the reasons for stock index behaviour are attributed to industrial composition as some industries are internally more volatile than the other [Grinold, Rudd, and Stefek (1989)]. Moreover, some sectors show a high degree of global integration, for example, the finance sector [Roll (1992)]. Similarly, consumer goods, fuel and energy, and transportation sectors are extremely important for any country index. King (1966) suggests that if a significant difference in industry risk premia is observed, then we need to isolate the market risk premia and industry risk premia. He observed that the industry components of variance showed much less change from sub-period to sub-period. Significant differential impact of regulatory policy on cost of capital across various sectors was also observed [Isimbabi (1994); Prager (1989)]

The Application of Integrated Knowledge-based Systems for the Biomedical Risk Assessment Intelligent Network (BRAIN)

One of NASA's goals for long duration space flight is to maintain acceptable levels of crew health, safety, and performance. One way of meeting this goal is through the Biomedical Risk Assessment Intelligent Network (BRAIN), an integrated network of both human and computer elements. The BRAIN will function as an advisor to flight surgeons by assessing the risk of in-flight biomedical problems and recommending appropriate countermeasures. This paper describes the joint effort among various NASA elements to develop BRAIN and an Infectious Disease Risk Assessment (IDRA) prototype. The implementation of this effort addresses the technological aspects of the following: (1) knowledge acquisition; (2) integration of IDRA components; (3) use of expert systems to automate the biomedical prediction process; (4) development of a user-friendly interface; and (5) integration of the IDRA prototype and Exercise Countermeasures Intelligent System (ExerCISys). Because the C Language, CLIPS (the C Language Integrated Production System), and the X-Window System were portable and easily integrated, they were chosen as the tools for the initial IDRA prototype. The feasibility was tested by developing an IDRA prototype that predicts the individual risk of influenza. The application of knowledge-based systems to risk assessment is of great market value to the medical technology industry

Toward a Sunny Future? Global Integration in the Solar PV Industry

Policymakers seem to face a trade-off when designing national trade and investment policies related to clean energy sectors. They have pledged to address climate change and accelerate the large-scale deployment of renewable energy technologies, which would benefit from increased global integration, but they are also tempted to nurture and protect domestic clean technology markets to create green jobs at home and ensure domestic political support for more ambitious climate policies. This paper analyzes the global integration of the solar photovoltaic (PV) sector and looks in detail at the industry’s recent growth patterns, industry cost structure, trade and investment patterns, government support policies and employment generation potential. In order to further stimulate both further growth of the solar industry and local job creation without constructing new trade and investment barriers, we recommend the following: (1) Governments must provide sufficient and predictable long-term support to solar energy deployment. Such long-term frameworks bring investments forward and encourage cost cutting and innovation, so that government support can decrease over time. A price on carbon emissions would provide an additional long-term market signal and likely accelerate this process. (2) Policymakers should focus not on solely the manufacturing jobs in the solar industry, but on the total number of jobs that could possibly be created including those in research, project development, installation, operations and maintenance. (3) Global integration and broader solar PV technology deployment through lower costs can be encouraged by keeping global solar PV markets open. Protectionist policies risk slowing the development of global solar markets and provoking retaliatory actions in other sectors. Lowering existing trade barriers—by abolishing tariffs, reducing non-tariff barriers and harmonizing industry standards—would create a positive policy environment for further global integration.Solar PV, climate change, renewable energy, government support, green protectionism, green jobs, global integration

Vertical Integration and Market Power in Electricity Markets

Vertical separation of generation from electricity retailing has often been required as a condition of electricity market liberalisation. A well-developed and liquid contracts market is similarly suggested as necessary to manage the resulting wholesale market risks which risks are further exacerbated by competition. Such contracts markets are rare however and increasingly evidence is emerging that vertical integration is associated not just with improved wholesale market risk management but also reduced wholesale market power. This paper develops a theoretical model showing that non-vertically integrated generators will over-report their inverse supply curves with the incentive to over-report increasing with the firm's share of generating capacity. Conversely in a vertically integrated industry no over-reporting occurs when integrated firms have balanced shares in wholesale and retail markets. In general firms whose share of generating capacity is higher (lower) than their retail market share will over-report (under-report) their inverse supply functions. Integration is found to affect retail electricity prices only via its effect on retail marginal costs. We find that retail prices are higher with vertical separation than with either balanced integration or full integration without a wholesale market. These results suggest a re-evaluation of the importance of generator wholesale market power in vertically integrated electricity industries and of measures to improve retail market competitiveness under either vertical integration or separation

Regulatory reform in Mexico's natural gas industry : liberalization in the context of a dominant upstream incumbent

The natural gas industry combines activities with natural monopoly characterisitics with those that are potentially competitive. Pipeline transport and distribution, which have natural monopoly characterisitcs, require regulation of price and non-price behavior. Production is a contestable activity, but in a few countries (including Mexico) it remains a state monopoly. Gas marketing is also contestable, but the presence of a dominant, upstream, vertically integrated incumbent may pose significant barriers to entry. Market architecture decisions--such as horizontal structure, regional development, and the degree of vertical integration--are also crucial. The authors report that Mexico has undertaken structural reform in the energy sector more slowly than many other countries,but it has introduced changes to attract private investment in natural gas transport and distribution. These changes were a response to the rapid growth in demand for natural gas (about 10 percent a year) in Mexico, which was in turn a response to economic development and the enforcement of environmental regulations. The new regulatory framework provides incentives for firms to invest and operate efficiently and to bear much much of the risk associated with new projects. It also protects captive consumers and improves general economic welfare. The continued vertical integration of the state-owned company Pemex and its statutory monopoly in domestic production posed a challenge to regulators. Their response in liberalizing trade, setting first-hand sales prices, and regulating natural gas distribution makes the Mexican case an interesting example of regulatory design. As the first phase of investment mobilization and competition for the market in Mexican distribution project concludes, remaining challenges include consistently and transparently enforcing regulations, coordinating tasks among government agencies, and ensuring expansion of gas transport services and domestic production. A key challenge in the near term will be fostering competition in the market. In strengthening the role of market forces, one issue is Pemex's discretionary discounts on domestic gas and access to transport services, made possible by its monopoly in domestic production and marketing activities and its overwhelming dominance in transport. The main instrument available to the regulator is proscribing Pemex contract pricing, but more durable and tractable instruments should be considered.Water and Industry,Oil Refining&Gas Industry,Energy and Environment,Oil&Gas,Carbon Policy and Trading

The Case for CAPSL: Architectural Solutions to Licensing and Distribution in Emerging Music Markets

Compulsory licensing in music has paved the way for a limited class of new noninteractive services. However, innovation and competition are stifled in the field of interactive or otherwise novel services due to high transaction costs inherent in direct licensing. While the creation of a new compulsory license available to a wider array of services may facilitate growth and diversity in new markets, it is unlikely that the legislative process can deliver a new compulsory regime in time to serve relevant interests. Furthermore, the risk exists that legislation written in response to contemporary technology will likely fail to recognize the diversity within the music industry, and therefore will underserve both artists and potential licensees. As such, this brief argues for the creation and adoption of a new standardized protocol for artists and labels to announce the availability of new content with attached standardized licensing terms for automated integration into the catalogs of new or existing digital music services. Such a protocol would allow for automated systems of pricing, distribution, and tracking to reduce transaction costs, increase market transparency, and commodify user participation