The economic cost of mandatory CO2 emission cuts: A reduced-form approach with panel data: Working paper series--12-04

We follow Schmalensee, Stoker, and Judson (1998) to forecast CO2 emissions based on the Environmental Kuznets Curve (EKC). Our findings suggest that the EKC will not lead to significant decreases in CO2 emissions by 2050 for countries with the highest incomes. Therefore, mandatory emissions cuts may be required to limit climate change. Consistent with Horowitz (2009) and Ng and Zhao (2010), we use a reduced-form approach to estimate the economic costs of mandatory emission cuts. Based on our parameter estimates, we find that a 25% mandatory reduction in CO2 emissions from 1990 will lead to a 5.63% decrease in the combined GDP of 19 high-income OECD countries, and a 40% reduction will result in a 12.92% loss in income (holding other relevant variables constant)! Our estimates are substantially higher than those in Paltsev, Reillya, Jacobya, and Morris (2009) and Dellink, Briner and Clapp (2010), and suggest that the economic cost to limit climate change as envisioned in the Copenhagen Accord may be substantial. More research should be done before mandatory emission cuts are implemented

Stock reaction to market-wide information: Working paper series--08-14

An anomaly within the behavioral literature is that as yet there is no evidence suggesting that stocks mis-react to common information as they do to firm-specific information. We demonstrate the limitations of the previous research and revisit the issue of stock reaction to common information in this manuscript. We find a statistically and economically significant reaction pattern to common information as the behavioral models suggest we should. This finding thus complements the findings of stock mis-reaction to firm-specific information, and should benefit researchers attempting to understand investor behavior. Furthermore, we find that the size factor may not only proxy future economic growth as suggested by Vassalou (2003), but also the delayed reaction to the news related to future economic growth

Real aggregate activity and stock returns: Working paper series--12-07

The notion that real aggregate activity exerts important influence on stock returns has strong theoretical appeal but weak empirical support. We argue in this paper that the lack of empirical reaction to macro news might be at least partly due to the usual focus on macro variables, which are noisy measures of real aggregate activity or the common factor. To test our conjecture, we focus on the Chicago Fed National Activity Index (CFNAI-MA3), a single summary measure of the common factor in 85 macro variables. Our main finding is that the news component of this index does affect stock returns. The effects show up at the market level as well as at the portfolio level

Macroeconomic announcements and foreign exchange risk: Working paper series--14-05

Savor and Wilson (2013a, 2013b) suggest that the tradeoff between state variable risk and asset returns underlying standard asset-pricing theories should be particularly strong on prescheduled macroeconomic announcement days, because important information about the state of the economy is revealed at such times. We apply this insight to foreign-exchange risk, and find robust evidence that foreign-exchange risk is priced on prescheduled macroeconomic announcement days. Our results make important contributions to both international finance and empirical asset-pricing literature

What do financial markets reveal about global warming? Working paper series--09-13

Global warming and its importance are controversial. While a variety of estimates exists of the likelihood of global warming and its economic cost, financial market information can provide an objective assessment of expected losses due to global warming. We consider a Merton-type asset pricing model in which asset prices are affected by the changes in investment opportunities caused by global warming. In this setting, global warming would imply a negative risk premium, with most assets loading negatively on the global warming factor, and financial assets in sectors that are more sensitive to global warming exhibiting stronger negative loadings. Utilizing a variant of Campbell and Diebold's (2005) weather forecasting model in conjunction with Lamont's (2001) and Vassalou's (2003) approach for extracting financial market "news", we empirically uncover the global warming factor. We find that the risk premium is indeed significantly negative and becoming more so over time, that loadings for most assets are negative, and that asset portfolios in industries considered to be more vulnerable to global warming (see IPCC, 2007, and Quiggin and Horowitz, 2003) have significantly stronger negative loadings on the global warming factor. We estimate that required returns on average are 0.11 percentage points higher due to the global warming factor, translating to a present value loss of 4.18 percent of wealth. The industry loadings appear to be unrelated to potential vulnerability to emissions regulation. Rather, the loss in wealth represents a general cost from increased systematic risk due to uncertainty in the extent and impact of warming and the increased incidence of extreme weather events, thus complementing existing estimates of the cost of global warming

Time and regime dependence of foreign exchange exposure: Working paper series--10-11

In this paper, we extend Francis, Hasan, and Hunter (2008) and Stacks and Wei (2005) by simultaneously taking into account the time and the regime dependence of foreign exchange exposure in a reduced-form framework. Specifically, we use a random coefficient model and the quantile regression technique invented by Koenker and Bassett (1978) to examine the currency exposure of 30 US industry portfolios. We find that all 30 industry portfolios exhibit significant foreign exchange exposure. Therefore, our results support Francis, Hasan, and Hunter (2008) and Stacks and Wei (2005), and suggest that the methodological weakness, not hedging, explains the insignificance of currency risk in previous studies

An econometric analysis of the impact of forest restoration on agriculture in the Verde River Watershed, Arizona: Working paper series--14-04

Known as the Four Forest Restoration Initiative (4FRI), the US Forest Service is planning a large-scale restoration of ponderosa pine forests in the Verde River watershed in central Arizona. This paper uses a reduced-form econometric regression model with 1969-2010 time-series data to estimate the economic benefits of the increased water yield due to planned forest restoration of the first phase of 4FRI. We split data sample into 1969-1989 and 1990-2010 time periods, and conclude that during the second time period, water use is statistically and economically significant. This is consistent with the reality that the Verde River watershed has been in drought since the early 1990s. Our central finding is that, if water use increases by 1%, the farm income will increase by 1.33%. If a 5-10% increase in water yield caused by the first phase of the 4FRI is all used by agriculture, agricultural income will increase by 6.65-13.3% annually

The vertical influence of temperature and precipitation on snow cover variability in the Central Tianshan Mountains, Northwest China

Seasonal snow cover in mountainous regions will affect local climate and hydrology. In this study, we assessed the role of altitude in determining the relative importance of temperature and precipitation in snow cover variability in the Central Tianshan Mountains. The results show that: (1) in the study area, temperature has a greater influence on snow cover than precipitation during most of the time period studied and in most altitudes. (2) In the high‐elevation area, there is a threshold altitude of 3900±400 m, below which temperature is negatively while precipitation is positively correlated to snow cover, above which the situation is the opposite. Besides, this threshold altitude decreases from snow accumulated period to snow stable period and then increases from snowmelt period to snow‐free period. (3) Below 2000 m, there is another threshold altitude of 1400±100 m during the snow stable period, below (above) which precipitation (temperature) is the main driver of snow cover

Numerical simulations for analyzing deformation characteristics of hydrate-bearing sediments during depressurization

Natural gas hydrates have been treated as a potential energy resource for decades. Understanding geomechanical properties of hydrate-bearing porous media is an essential to protect the safety of individuals and devices during hydrate production. In this work, a numerical simulator named GrapeFloater is developed to study the deformation behavior of hydrate-bearing porous media during depressurization, and the numerical simulator couples multiple processes such as conductive-convective heat transfer, two-phase fluid flow, intrinsic kinetics of hydrate dissociation, and deformation of solid skeleton. Then, a depressurization experiment is carried out to validate the numerical simulator. A parameter sensitivity analysis is performed to discuss the deformation behavior of hydrate-bearing porous media as well as its effect on production responses. Conclusions are drawn as follows: the numerical simulator named GrapeFloater predicts the experimental results well; the modulus of hydrate-bearing porous media has an obvious effect on production responses; final deformation increases with decreasing outlet pressure; both the depressurization and the modulus decrease during hydrate dissociation contribute to the deformation of hydrate-bearing porous media.Cited as: Liu, L., Lu, X., Zhang, X., et al. Numerical simulations for analyzing deformation characteristics of hydrate-bearing sediments during depressurization. Advances in Geo-Energy Research, 2017, 1(3): 135-147, doi: 10.26804/ager.2017.03.0