Weather forecasting for weather derivatives : [revised version: January 2, 2004]

We take a simple time-series approach to modeling and forecasting daily average temperature in U.S. cities, and we inquire systematically as to whether it may prove useful from the vantage point of participants in the weather derivatives market. The answer is, perhaps surprisingly, yes. Time-series modeling reveals conditional mean dynamics, and crucially, strong conditional variance dynamics, in daily average temperature, and it reveals sharp differences between the distribution of temperature and the distribution of temperature surprises. As we argue, it also holds promise for producing the long-horizon predictive densities crucial for pricing weather derivatives, so that additional inquiry into time-series weather forecasting methods will likely prove useful in weather derivatives contexts

Stock returns and expected business conditions : half a century of direct evidence

We explore the macro/finance interface in the context of equity markets. In particular, using half a century of Livingston expected business conditions data we characterize directly the impact of expected business conditions on expected excess stock returns. Expected business conditions consistently affect expected excess returns in a statistically and economically significant counter-cyclical fashion: depressed expected business conditions are associated with high expected excess returns. Moreover, inclusion of expected business conditions in otherwise standard predictive return regressions substantially reduces the explanatory power of the conventional financial predictors, including the dividend yield, default premium, and term premium, while simultaneously increasing R2. Expected business conditions retain predictive power even after controlling for an important and recently introduced non-financial predictor, the generalized consumption/wealth ratio, which accords with the view that expected business conditions play a role in asset pricing different from and complementary to that of the consumption/wealth ratio. We argue that time-varying expected business conditions likely capture time-varying risk, while time-varying consumption/wealth may capture time-varying risk aversion. Klassifikation: G1

Stock Returns and Expected Business Conditions: Half a Century of Direct Evidence

We explore the macro/finance interface in the context of equity markets. In particular, using half a century of Livingston expected business conditions data we characterize directly the impact of expected business conditions on expected excess stock returns. Expected business conditions consistently affect expected excess returns in a statistically and economically significant counter-cyclical fashion: depressed expected business conditions are associated with high expected excess returns. Moreover, inclusion of expected business conditions in otherwise standard predictive return regressions substantially reduces the explanatory power of the conventional financial predictors, including the dividend yield, default premium, and term premium, while simultaneously increasing R2. Expected business conditions retain predictive power even after controlling for an important and recently introduced non-financial predictor, the generalized consumption/wealth ratio, which accords with the view that expected business conditions play a role in asset pricing different from and complementary to that of the consumption/wealth ratio. We argue that time-varying expected business conditions likely capture time-varying risk, while time-varying consumption/wealth may capture time-varying risk aversion.Business Cycle, Expected Equity Returns, Prediction, Livingston Survey, Risk Aversion, Equity Premium, Risk Premium

Stock Returns and Expected Business Conditions: Half a Century of Direct Evidence

We explore the macro/finance interface in the context of equity markets. In particular, using half a century of Livingston expected business conditions data we characterize directly the impact of expected business conditions on expected excess stock returns. Expected business conditions consistently affect expected excess returns in a statistically and economically significant counter-cyclical fashion: depressed expected business conditions are associated with high expected excess returns. Moreover, inclusion of expected business conditions in otherwise standard predictive return regressions substantially reduces the explanatory power of the conventional financial predictors, including the dividend yield, default premium, and term premium, while simultaneously increasing. Expected business conditions retain predictive power even after controlling for an important and recently introduced non-financial predictor, the generalized consumption/wealth ratio, which accords with the view that expected business conditions play a role in asset pricing different from and complementary to that of the consumption/wealth ratio. We argue that time-varying expected business conditions likely capture time-varying risk, while time-varying consumption/wealth may capture time-varying risk aversion.Business cycle, expected equity returns, prediction, Livingston survey, risk aversion, equity premium, risk premium

Weather Forecasting for Weather Derivatives

We take a simple time-series approach to modeling and forecasting daily average temperature in U.S. cities, and we inquire systematically as to whether it may prove useful from the vantage point of participants in the weather derivatives market. The answer is, perhaps surprisingly, yes. Time-series modeling reveals conditional mean dynamics, and crucially, strong conditional variance dynamics, in daily average temperature, and it reveals sharp differences between the distribution of temperature and the distribution of temperature surprises. As we argue, it also holds promise for producing the long-horizon predictive densities crucial for pricing weather derivatives, so that additional inquiry into time-series weather forecasting methods will likely prove useful in weather derivatives contexts.Risk management; hedging; insurance; seasonality; temperature; financial derivatives

Stock Returns and Expected Business Conditions: Half a Century of Direct Evidence

We explore the macro/finance interface in the context of equity markets. In particular, using half a century of Livingston expected business conditions data we characterize directly the impact of expected business conditions on expected excess stock returns. Expected business conditions consistently affect expected excess returns in a statistically and economically significant counter-cyclical fashion: depressed expected business conditions are associated with high expected excess returns. Moreover, inclusion of expected business conditions in otherwisestandard predictive return regressions substantially reduces the explanatory power of the conventional financial predictors, including the dividend yield, default premium, and term premium, while simultaneously increasing R-squared. Expected business conditions retain predictive power even after controlling for an important and recently introduced non-financial predictor, the generalized consumption/wealth ratio, which accords with the view that expected business conditions play a role in asset pricing different from and complementary to that of the consumption/wealth ratio. We argue that time-varying expected business conditions likely capture time-varying risk, while time-varying consumption/wealth may capture time-varying risk aversion.

Specification testing and semiparametric estimation of regime switching models: An examination of the US short term interest rate

This paper develops a method for quantitatively and qualitatively assessing the adequacy of the normality assumption in regime switching models. A formal test that extends Jarque and Bera’s (1982) normality test to regime switching settings is proposed. Quasi maximum likelihood estimation of regime switching models is shown to be inconsistent. The feasibility of semiparametric identification of regime switching models is shown and a semiparametric estimator is proposed. Empirically, a two regime Gaussian model of the U.S. short term interest rate is shown to be misspecified. The semiparametric estimator reveals one low volatility regime that is well approximated by normality and one high volatility regime that is negatively skewed and leptokurtic relative to the normal distribution

Long-term impact of sewage sludge application on soil microbial biomass: An evaluation using meta-analysis

The Long-Term Sludge Experiments (LTSE) began in 1994 as part of continuing research into the effects of sludge-borne heavy metals on soil fertility. The long-term effects of Zn, Cu, and Cd on soil microbial biomass carbon (Cmic) were monitored for 8 years (1997-2005) in sludge amended soils at nine UK field sites. To assess the statutory limits set by the UK Sludge (Use in Agriculture) Regulations the experimental data has been reviewed using the statistical methods of meta-analysis. Previous LTSE studies have focused predominantly on statistical significance rather than effect size, whereas meta-analysis focuses on the magnitude and direction of an effect, i.e. the practical significance, rather than its statistical significance. The results presented here show that significant decreases in Cmic have occurred in soils where the total concentrations of Zn and Cu fall below the current UK statutory limits. For soils receiving sewage sludge predominantly contaminated with Zn, decreases of approximately 7–11% were observed at concentrations below the UK statutory limit. The effect of Zn appeared to increase over time, with increasingly greater decreases in Cmic observed over a period of 8 years. This may be due to an interactive effect between Zn and confounding Cu contamination which has augmented the bioavailability of these metals over time. Similar decreases (7–12%) in Cmic were observed in soils receiving sewage sludge predominantly contaminated with Cu; however, Cmic appeared to show of recovery after a period of 6 years. Application of sewage sludge predominantly contaminated with Cd appeared to have no effect on Cmic at concentrations below the current UK statutory limit