An Evolutionary Approach to Financial Innovation

The purpose of this paper is to explain why some markets for financial products take off while others vanish as soon as they have emerged. To this end, we model an infinite sequence of CAPM-economies in which financial products can be used for insurance purposes. Agents' participation in these financial products, however, is restricted. Consecutive stage economies are linked by a mapping ("transition function”) which determines the next period's participation structure from the preceding period's participation. The transition function generates a dynamic process of market participation which is driven by the percentage of informed traders and the rate at which a new asset is adopted. We then analyse the evolutionary stability of stationary equilibria. In accordance with the empirical literature on financial innovation, it is obtained that the success of a financial innovation, a mutation, depends on a sufficiently high trading volume, marketing, and new and differentiated hedging opportunities. In particular, a set of complete markets forming a stationary equilibrium is robust with respect to any further financial innovation while this is not necessarily true for a set of incomplete market

The economic value of storage in renewable power systems - the case of thermal energy storage in concentrating solar plants

In this article we analyze the value of thermal energy storages in concentrated solar plants depending on the electricity generation mix. To determine the value from a system integrated view we model the whole electricty generation market of the Iberian Peninsula. Key findings for thermal energy storage units in concentrated solar plants include an increasing value in electricity systems with higher shares of fluctuating renewable generation and a potentially significant role in a transformation to a primarily renewable based electricity system. Due to the relatively high investment costs concentrated solar power plants with or without thermal energy storages are not cost efficient in todays electricity markets. However, expected cost reductions due to learning curve effects and higher fluctuating renewable generation may lead to a comparative cost advantage of concentrated solar power plants with thermal energy storages compared to other renewable technologies.Fluctuating renewables; value of storage; concentrated solar power; power plant optimization

The economic value of storage in renewable power systems - the case of thermal energy storage in concentrating solar plants

In this article we analyze the value of thermal energy storages in concentrated solar plants depending on the electricity generation mix. To determine the value from a system integrated view we model the whole electricty generation market of the Iberian Peninsula. Key findings for thermal energy storage units in concentrated solar plants include an increasing value in electricity systems with higher shares of fluctuating renewable generation and a potentially significant role in a transformation to a primarily renewable based electricity system. Due to the relatively high investment costs concentrated solar power plants with or without thermal energy storages are not cost efficient in todays electricity markets. However, expected cost reductions due to learning curve effects and higher fluctuating renewable generation may lead to a comparative cost advantage of concentrated solar power plants with thermal energy storages compared to other renewable technologies

Anspruch und Wirklichkeit: Kann das Pariser Klimaabkommen funktionieren?

Ist das Klimaabkommen, das auf der Weltklimakonferenz in Paris im Dezember 2015 beschlossen wurde, ein wichtiger Schritt für den weltweiten Klimaschutz? Joachim Weimann, Universität Magdeburg, sieht zwar in der Tatsache, dass es überhaupt ein Abkommen gibt und dass sich Länder verpflichten, Klimaschutz zu betreiben, einen gewissen Fortschritt. Ein erfolgreicher Klimaschutz kann aber seiner Ansicht nach nur gelingen, wenn eine internationale Klimapolitik betrieben wird. In Paris wurde das genaue Gegenteil festgeschrieben, nämlich eine nationale Politik, bei der jedes einzelne Land seine eigenen Reduktionsziele definiere und selbstständig umsetze. Für Rüdiger Pethig, Universität Siegen, stellt das Pariser Abkommen trotz vielen Schwachstellen einen Meilenstein gegenüber dem davor Erreichten dar. Es sei zwar keineswegs die Lösung des Klimaproblems, aber habe die Hoffnung auf eine zukünftige Lösung ein wenig erhöht. Barbara Hendricks, Bundesministerin für Umwelt, Naturschutz, Bau und Reaktorsicherheit, sieht in dem Paris-Abkommen die Chance, den Klimawandel in den Griff zu bekommen, denn mit dem Pariser Abkommen sei das Fundament für erfolgreichen internationalen Klimaschutz gelegt worden. Zentraler Bezugspunkt für die nationalen Planungen bleibe die europäische Klimaschutzpolitik. Für Ottmar Edenhofer, Potsdam-Institut für Klimafolgenforschung, Christian Flachsland und Ulrike Kornek, MCC, Berlin, ist das Abkommen noch kein klimapolitischer Durchbruch. Jetzt komme es darauf an, die Diskussion über koordinierte CO2-Mindestpreise und konditionale Klimafinanzierung so voranzutreiben, dass die Chancen internationaler Kooperation steigen. Zentral ist für Thomas Puls und Thilo Schae­fer, Institut der deutschen Wirtschaft Köln e.V., dass die großen CO2-Emittenten eine koordinierte Klimapolitik verfolgen und dass sich die Verweigerung von Klimaschutz nicht mehr ökonomisch rechnet. Das gehe am besten, wenn »die Schwergewichte« ein Preissystem für CO2 vereinbarten. Sven Schulze,

Decarbonisation of transport: options and challenges

This EASAC report reviews options for reducing greenhouse gas (GHG) emissions from European transport. It argues for stronger policies to bridge the gap between the GHG emission reductions that will be delivered by current policies and the levels needed to limit global warming to less than 2°C or even 1.5°C (Paris Agreement). The report focusses on road transport because, in the EU, this contributes 72% of transport GHG emissions. EASAC recommends a combination of transitional measures for the next 10-15 years and sustainable measures for the long term, based on a three level policy framework: avoid and contain demand for transport services; shift passengers and freight to transport modes with lower emissions (trains, buses and ships); and improve performance through vehicle design, more efficient powertrains and replacing fossil fuels with sustainable energy carriers including low-carbon electricity, hydrogen and synthetic fuels. Opportunities for the EU to strengthen its industrial competitiveness and create high quality jobs are also discussed

An Evolutionary Approach to Financial Innovation

"The purpose of this paper is to explain why some markets for financial products take off while others vanish as soon as they have emerged. To this end, we model an infinite sequence of CAPM-economies in which financial products can be used for insurance purposes. Agents' participation in these financial products, however, is restricted. Consecutive stage economies are linked by a mapping (""transition function"") which determines the next period's participation structure from the preceding period's participation. The transition function generates a dynamic process of market participation which is driven by the percentage of informed traders and the rate at which a new asset is adopted. We then analyze the evolutionary stability of stationary equilibria. In accordance with the empirical literature on financial innovation, it is obtained that the success of a financial innovation, a mutation, depends on a sufficiently high trading volume, marketing, and new and differentiated hedging opp

Financial innovation, communication and the theory of the firm

When markets are incomplete, the competitive equilibria considered so far are not constrained Pareto–efficient, production efficiency breaks down and shareholders no longer agree on the objective function of the firm. We first show by way of an example that these inefficiencies can result from the double role of firms in incomplete markets: providing high market value and providing good hedging opportunities (spanning role). To disentangle these two conflicting roles of the firm’s decision, we then suggest to let the firm choose a relevant financial policy by issuing securities being collaterized by the production plan. In order to guarantee that the firm does not choose to innovate trivial assets, it is then shown to be crucial that the firm‘s shareholders agree on the same set of state prices. Therefore we introduce some communication network into the model which allows the shareholders to exchange their views on the firm’s best policies. In our main result we demonstrate that competitive equilibria with communication of shareholders and a relevant financial policy of the firm are Pareto–efficient, provided there are at least as many firms as there are shareholders

Financial intermediation and the welfare theorems in incomplete markets

In production economies with incomplete markets, shareholders disagree about the objective of the firm. We show that a weak financial intermediary, who is unable to complete markets, can offer just enough spanning to resolve this disagreement. The intermediary is limited to offering one customized contract per consumer. Knowledge of demand functions is sufficient for offering the right contracts. Once agreement among shareholders is reached, productive efficiency is restored, which in turn permits a Pareto efficient market outcome. This result shows that the first welfare theorem does not depend on complete spanning, but merely on institutions that provide the right span. However, this cannot be said about the second welfare theorem: For some wealth distributions, equilibria with transfers fail to exist due to nonconvexities caused by market incompleteness

Evolutionary Choice of Markets

We consider an economy where a finite set of agents can trade on one of two asset markets. Due to endogenous participation the markets may differ in the liquidity they provide. Moreover, traders have idiosyncratic preferences for the markets, e.g. due to differential time preferences for maturity dates of futures contracts. For a broad range of parameters we find that no trade, trade on both markets (individualization) as well as trade on one market only (standardization) is supported by a Nash equilibrium. By contras