An Ethanol Blend Wall Shift is Prone to Increase Petroleum Gasoline Demand

The US Environmental Protection Agency announced a waiver allowing an increase in the Fuel-Ethanol blend limit (the “blend wall” ) from 10% (E10) to 15% (E15) on October,2010.Justifications for the waiver are reduced vehicle fuel prices and less consumption of petroleum gasoline, leading to energy security. In this paper, employing Monte Carlo simulations and Savitzky-Golay smoothing filter, an empirical study examines this waiver revealing an anomaly where a relaxation of this blend wall elicits a demand response. Under a wide range of elasticities, this demand response can actually increase the consumption of petroleum gasoline and thus lead to greater energy insecurity. The economics supporting this result and associated policy implications are developed and discussed.Blend wall, Energy security, Ethanol, Resource /Energy Economics and Policy,

Pricing European and American Options under Heston Model using Discontinuous Galerkin Finite Elements

This paper deals with pricing of European and American options, when the underlying asset price follows Heston model, via the interior penalty discontinuous Galerkin finite element method (dGFEM). The advantages of dGFEM space discretization with Rannacher smoothing as time integrator with nonsmooth initial and boundary conditions are illustrated for European vanilla options, digital call and American put options. The convection dominated Heston model for vanishing volatility is efficiently solved utilizing the adaptive dGFEM. For fast solution of the linear complementary problem of the American options, a projected successive over relaxation (PSOR) method is developed with the norm preconditioned dGFEM. We show the efficiency and accuracy of dGFEM for option pricing by conducting comparison analysis with other methods and numerical experiments

Missing the marks? Dispersion in corporate bond valuations across mutual funds

We study the dispersion of month-end valuations placed on identical corporate bonds by different mutual funds. Such dispersion is related to bond-specific characteristics associated with liquidity and market volatility. TRACE may have contributed to the general decline in dispersion over our sample period, though other factors most likely played roles. Further tests reveal marking patterns to be consistent with returns smoothing behavior by managers. Funds with ambiguous marking policies and those holding 'hard-to-mark' bonds appear more prone to smooth reported returns. From a regulatory perspective, we see little downside to requiring funds to explicitly state their marking standards. --

Food Crises and Asset Liquidation: Household-level Evidence from Tanzania

This paper studies the effects of food crises–large and sudden increases in food prices–on asset liquidation. Substantial research exists on household food insecurity as a result of a food crisis, but studies on households’ coping strategies have so far been limited to natural shocks such as flood, drought, and financial crises. In this paper, I use an adapted version of the asset-based poverty trap model to explain households’ use of asset liquidation as a coping strategy when faced with food crises. To test my theory, I employ a household-level panel data set from Tanzania that covers the years 2008, 2010, and 2012. I estimate fixed effects regressions of productive and unproductive asset levels on a measure of household-specific food prices. I find no statistically significant evidence in support of asset liquidation. My results suggest an asset smoothing behavior across all types of households

Propagation and smoothing of shocks in alternative social security systems

Even with well-developed capital markets, there is no private market mechanism for trading between current and future generations. This generates a potential role for public old-age pension systems to spread economic and demographic shocks among different generations. This paper evaluates how different systems smooth and propagate shocks to productivity, fertility, mortality and migration in a realistic OLG model. We use reductions in the variance of wealth equivalents to measure performance, starting with the existing U.S. system as a unifying framework, in which we vary how much taxes and benefits adjust, and which we then compare to the existing German and Swedish systems. We find that system design and shock type are key factors. The German system and the benefit-adjustment-only U.S. system best smooth productivity shocks, which are by far the most important shocks. Overall, the German system performs best, while the Swedish system, which includes a buffer stock to relax annual budget constraints, performs rather poorly. Focusing on the U.S. system, reliance solely on tax adjustment fares best for mortality and migration shocks, while equal reliance on tax and benefit adjustments is best for fertility shocks

Book vs. fair value accounting in banking and intertemporal smoothing

The aim of this paper is to examine the pros and cons of book and fair value accounting from the perspective of the theory of banking. We consider the implications of the two accounting methods in an overlapping generations environment. As observed by Allen and Gale(1997), in an overlapping generation model, banks have a role as intergenerational connectors as they allow for intertemporal smoothing. Our main result is that when dividends depend on profits, book value ex ante dominates fair value, as it provides better intertemporal smoothing. This is in contrast with the standard view that states that, fair value yields a better allocation as it reflects the real opportunity cost of assets. Banking regulation play an important role by providing the right incentives for banks to smooth intertemporal consumption whereas market discipline improves intratemporal efficiency.Banking, shocks, insurance, intertemporal, Overlapping Generations Equilibrium

Interstate risk sharing in Germany: 1970-2006

We study the channels of interstate risk sharing in Germany for the time period 1970 to 2006 following the methodology of Asdrubali et al. (1996). Their framework allows us to estimate the degree of smoothing of a shock to a state's gross domestic product by factor markets, the government sector, and credit markets, respectively. For the time period from 1970 to 1994 pre-unification Germany we find that about 19 percent of shocks to a state's gross domestic product (GDP) are smoothed by private factor markets, 50 percent are smoothed by the German government sector, and a further 17 percent are smoothed through credit markets. For the post-reunification period, 1995 to 2006, the relative importance of the smoothing channels changes. In the complete sample, factor markets contribute around 50.5 percent to consumption smoothing, and credit markets contribute another 17.5 percent. The government sector's role is diminished: it smoothes around 10 percent of a shock. For this period, we also split our sample between West and East German states. In West Germany, 63 percent of idiosyncratic income shocks are smoothed out by factor markets; and another 15 percent by the government sector. In East Germany, factor markets smooth about 34.5 percent of the volatility in state GDP, the government sector about 19 percent, and another 18 percent are smoothed by credit markets. --Regional Risk-sharing,Factor Markets,Consumption Smoothing,Fiscal Federalism

Pension systems and financial systems in Europe: a comparison from the point of view of complementarity : [Version July 2001]

At present, the question of how national pension or retirement payment systems should be organised is being hotly debated in various countries, and opinions vary widely as to what should be regarded as the optimal design for such systems. It appears to the authors of the present paper that in this entire discussion one aspect is largely overlooked: What relationships exist between the pension system and the financial system in a given country? As such relationships might prove to be important, the present paper investigates the following questions: (1) Are there differences between the national pension systems of three major European countries – Germany, France and the U.K. – and between the financial systems of these countries? (2) And if the existence of such differences can be demonstrated, is there a correspondence between the differences with respect to the various national pension systems and the differences as regards the countries’ financial systems? (3) And if such a correspondence exists, is there any kind of interrelationship between the national financial and pension systems of the individual countries which goes beyond a mere correspondence? Looking mainly at two aspects – namely, risk allocation and the incentives to create human capital – the authors of this paper argue (1) that there are indeed considerable differences between the financial and pension systems of the three countries; (2) that in both Germany and the U.K. there are also systematic correspondences between the respective pension systems and financial systems and their economic characteristics, but that such a correspondence cannot be identified in the case of France; and (3) that these parallels are, in the final analysis, based on complementarities and are therefore likely to contribute to the efficiency of the German and the British systems. The paper concludes with a brief look at policy implications which the existence of, or the lack of, consistency between national pension systems and national financial systems might have