In this paper, we propose an easy-to-use yet comprehensive model for a system of cointegrated commodity prices. While retaining the exponential affine structure of previous approaches, our model allows for an arbitrary number of cointegration relationships. We show that the cointegration component allows capturing well-known features of commodity prices, i.e., upward sloping (contango) and downward sloping (backwardation) term-structures, smaller volatilities for longer maturities and an upward sloping correlation term structure. The model is calibrated to futures price data of ten commodities. The results provide compelling evidence of cointegration in the data. Implications for the prices of futures and options written on common commodity spreads (e.g., spark spread and crack spread) are thoroughly investigated.
Identifying investment strategies that will survive in the long run is a main endeavor in the eld of evolutionary nance. The evolutionary perspective on the nancial market considers rather long time horizons, making the creation and disappearance of rms a highly relevant factor in determining such strategies. However, this factor has not been examined in existing research. This paper seeks to ll the gap in the literature by simulating dividends and investment strategies on the basis of initial public offerings (IPOs) and defaults. This paper simulates the evolution of the wealth shares of various investment strategies in a setup wherein dividends are nonstationary. The results show that a modied version of the generalized Kelly rule dominates competing investment strategies in terms of nal wealth. This nding agrees with the existing literature, which suggests that the generalized Kelly rule has good chances of surviving or even taking over the entire market in different setups. However, the creation and dissolution of a rm can only be observed once in the life of a company; therefore, using only a long time series of one company alone is not the most optimal method of estimating the probability that a rm will default. Instead, the dividend process must be understood by examining similar companies. This completely alters the implementation of the generalized Kelly rule compared with the way it is applied in the existing evolutionary nance literature, even when the dividend processes of the companies involved are independent of each other.
We consider a simple CAPM with heterogenous expectations on assets mean returns while keeping the assumption of homogenous expectations on the covariance of returns. Our first result derives the security market line as an aggregation result without using the two-fund-separation property. In particular every investor can hold optimal portfolios that are underdiversified.In our model alpha-opportunities can be explained as a feature of financial market equilibria and we can show that alpha-opportunities erode with the assets under management and that the hunt for alphaopportunities is a zero-sum game. Then we endogenize the agents information by allowing them to be either passive, in which case they invest according to the average expectation embodied in the market returns, or to be active, in which case they can acquire superior information at some cost. It is shown that expecting a positive alpha is not necessarily a good criterion for becoming active. Moreover, the less risk averse investors are more inclined to be active and delegating active investment to portfolio managers only makes sense if the performance fee increases with the skill of the portfolio manager. Finally, in our model it turns out that only a market in which all investors are passive and share the same correct belief is stable with respect to information acquisition. Hence the standard CAPM with homogenous beliefs can be seen as the long run outcome of our model.
We document a general pattern in the euro area overnight interbank rate (EONIA) and analyze how German banks compared to other EMU banks respond to these predictable changes in the price for reserve holdings. At the beginning of the maintenance period, when the EONIA is typically above average, we observe that German banks hold substantially less reserves than their daily average required reserves. Thus in contrast to other EMU banks, German banks back load the fulfillment of their reserve requirements over the reserve maintenance period and thereby benefit from the general pattern in the EONIA. Looking at the disaggregate data we find than this is particularly the case for the Landesbanks. We argue that the end of the calender month effect in the EONIA may be driven by a temporary shortage of liquidity, relative to reserve requirements, at the beginning of the maintenance period (which coincides with the end of the calendar month).
This paper is concerned with clarifying the link between risk measurement and capital efficiency. For this purpose we introduce risk measurement as the minimum cost of making a position acceptable by adding an optimal combination of multiple eligible assets. Under certain assumptions, it is shown that these risk measures have properties similar to those of coherent risk measures. The motivation for this paper was the study of a multi-currency setting where it is natural to use simultaneously a domestic and a foreign asset as investment vehicles to inject the capital necessary to make an unacceptable position acceptable. We also study what happens when one changes the unit of account from domestic to foreign currency and are led to the notion of compatibility of risk measures. In addition, we aim to clarify terminology in the field.
We set up a two-sided market framework to model competition between a Prefered Provider Organization (PPO) and a Health Maintenance Organization (HMO). Both health plans compete to attract policyholders on one side and providers on the other. The PPO, which is characterized by a higher diversity of providers, attracts riskier policyholders. Our two-sided framework allows us to examine the consequences of this risk segmentation on the providers' side, especially in terms of remuneration. The outcome of the competition depends mainly on two effects: a demand effect, influenced by the value put by policyholders on the providers access and an adverse selection effect, captured by the characteristics of the health risk distribution. If the adverse selection effect is too strong, the HMO receives a higher profit in equilibrium. On the contrary, if the demand effect dominates, the PPO profit is higher in spite of the unfavorable risk segmentation. We believe that by highlighting the two-sided market structure of the health plans' competition, our model provides a new insight to understand the increase in the PPOs' market share as observed in the USA during the last decade.
