A recent empirical study (Constantinides et al, 2011) argues that S&P 500 Index call options are frequently overpriced in the sense that any rational agent can improve her expected utility by writing these calls. Little work has addressed why such apparent mispricing is so common. For the first...

In relation to creating a CO2 emission permit market, there are two types of climate change policy risks: 1) It is uncertain whether and when a cap-and-trade system will be implemented; and 2) once a policy is in place, there may be government credibility issues. This paper examines the effect of...

The LME is a major international commodity exchange for industrial metals. Both futures contracts and spot metals are traded there, and the textbook principle of the futures-spot convergence precisely holds there. In this paper, we formulate two claims about spot and futures return prediction....

This article proposes a simple but realistic model to co-simulate the time series of three risk factors: temperature, electricity load, and prices. In addition, the authors provide load serving entities with a quantitative analysis of an electricity price-volume joint risk; illustrate a hedging...

We develop an extended mean-variance model to investigate the relationship between variance risk premia (VRP) and expected futures returns in the commodity market. In the presence of stochastic variance, commodity producers trade both futures and options to hedge their exposure to commodity...

Using Quantile-Preserving Spreads and Stochastic Dominance, this paper studies how modifying a real option's characteristic affects the real option holding value and optimal exercise decision. We find that the direction of change in exercise probability and timing depends on the preserved...

To evaluate complex hedging deals from a cost-efficiency perspective, this paper proposes a new hedging-effectiveness measure, the Economic Value of the Incremental Expected Shortfall (EV-IES), which summarizes the costs and benefits of a hedging strategy by taking into account firm-specific and...