Theses (Economics)

Permanent URI for this collection


Recent Submissions

Now showing 1 - 20 of 51
  • Item
    Trade Openness and Inflation Dynamics: A Panel Data Analysis
    (2024-01-31) Parsi, Rouzbeh; Gabriel, Vasco
    This thesis focuses on the intricate empirical relationship between trade openness and inflation, challenging previous literature that suggests a straightforward negative correlation between the two. By employing recently developed dynamic heterogeneous panel methods and constructing a comprehensive panel dataset, which encompasses a spectrum of economic, political, and financial indicators, as well as two proxies for openness, we offer a nuanced perspective on the topic. Central to our findings is the critical role of allowing cross-sectional dependence in panel data, which has been frequently overlooked in past studies. Our analysis reveals a multifaceted relationship, where the influence of trade openness on inflation is dynamic and ambiguous in its direction. While traditional openness metrics remain useful, multidimensional proxies, such as the KOF trade openness index, have the potential to provide richer insights. Our results underscore the need for a thorough analysis and robust methodologies when exploring this economic relationship, suggesting that the dynamics of trade and inflation are more complex than previously assumed.
  • Item
    The Effect of NYSE American’s Latency Delay on Informed Trading
    (2023-12-18) Morris, Jeremy; Xu, Ke
    Insider trading plays a significant role in financial markets and how markets respond to new information. Informed high-frequency traders pose a major risk to liquidity providers in financial markets due to adverse selection, which can result in market failure. To mitigate this risk, some exchanges have implemented speed bumps which delay trades. Using trade and quote (TAQ) data of 45 stocks on the NYSE American and the NASDAQ from May 2017 to August 2017, I identify the impact of a trading delay of 350 microseconds on the probability of informed trading for the NYSE American using difference-in-differences estimation. I find a statistically significant decline in the probability of informed trading after the implementation of the speed bump on the NYSE American stock exchange.
  • Item
    Mitigating Drug Market Externalities: How Effective Are Current Law Enforcement Strategies?
    (2023-04-13) Dodd, Taylor; Gillezeau, Rob; Auld, Christopher
    This study investigates the impact that search warrants and subsequently, drug trafficking charges, have on drug market externalities. Specifically, this research studies the impact that the closure of an illicit drug firm has on drug use health emergencies and crime at the neighbourhood level. I employ a difference-in-differences empirical strategy to estimate how these search warrants affect neighbourhood drug use patterns and crime. Finding evidence of very small and short run effects, this paper argues that these search warrants have limited effects on crime and drug use health emergencies on average at the neighborhood level but ultimately, the long-run effects are indistinguishable from zero.
  • Item
    Inflation Targeting and Policy Horizons
    (2022-12-21) Mu, Junhong; Voss, Graham M.
    This study explores the role of flexibility in inflation targeting from two distinct perspectives. Using a qualitative approach, the first component summarizes and evaluates the monetary policy frameworks of inflation-targeting central banks across the industrialized world, focusing on the communication of monetary policy through framework documents and flagship publications. After establishing the core tenets of modern inflation targeting and key differences between the current frameworks of central banks within the OECD, I provide a detailed review of the Bank of Canada's experience with inflation targeting. I find that the role of flexibility within the Bank's policy framework has evolved in response to key events such as the 2008-09 financial crisis and the Covid-19 pandemic. The second component evaluates whether changes in the Bank of Canada's inflation targeting framework can be identified in the empirical evidence. Using conditional forecasts from a univariate model of inflation, I estimate policy horizons - the period over which forecasted inflation returns to target following a shock - from 2000 to 2022. I find that for a particular set of criteria for convergence, the range of estimated policy horizons is consistent with the Bank's stated target horizon of 6 to 8 quarters. Additionally, the distribution of estimates reflects a narrow type of flexibility in which the lengths of policy horizons vary based on the current level of inflation and the persistence of recent shocks. Estimating unique models for sample periods corresponding to the tenures of former Bank of Canada Governors Dodge, Carney, and Poloz, I find that there has been some variation in the behaviour of estimated policy horizons over time, which may reflect changes in central bank behaviour, changes in the economic environment, or a combination of both factors.
  • Item
    Optimization of the Renewable Power Grid: Calibration and Application
    (2022-10-06) Duan, Jun; Van Kooten, G. C.
    The goal of this study is to determine the economic implications of incorporating intermittent renewable energy into current power systems. The study also considers how to achieve an optimal mix of generating assets with renewable power, as well as the costs and advantages of using renewable energy sources to reduce CO2 emissions. Furthermore, this study examines how renewable energy exacerbates the "missing money" problem, which is a critical problem in electricity market design. The last part of this research is devoted to the calibration of the hybrid electricity grid model. We adopt positive mathematical programming (PMP) to calibrate the quadratic cost function for fossil fuel power plants. The calibrated model enables us to better analyze the impact of renewable energy on the electricity market. We find that due to the intermittency of wind and solar power, renewable energy could replace part of the peak load capacity like gas turbines but is not able to replace most of the base load capacity like coal capacities. The unintended consequences are that to eliminate the coal base load capacity, other forms of baseload capacities such as nuclear or hydropower capacity are necessary to incorporate the intermittent renewable power. Moreover, the capacity factors of remained peak load capacities and newly built base load capacities declined. Further support policies for maintaining the capacity adequacy standard are necessary for a reliable hybrid electricity market.
  • Item
    Historical Wrongs and Socioeconomic Participation: Evidence from Forced-Coexistence and Voter Turnout Rates in Indigenous America
    (2022-09-23) Marra, Fab; Feir, Donn
    There is a fraught history between the United States federal government and American Indian Nations. Recent literature has argued that Native nations that were historically subject to more interventionist federal policies have worse economic outcomes today. In this paper, I provide evidence that a specific historical intervention that has been shown to impact economic development, specifically the forced political co-existence of distinct American Indian bands on reservations, also impacts voting behavior. I demonstrate that presidential election voter rates in 2012 and 2016 are roughly 2-3 percentage points lower in counties that contain a reservation in which bands were forced to coexist versus counties than contain a reservation that weren’t subject to forced coexistence. Marriage rates and more recent Native American incomes are also lower. As a falsification test, I provide evidence that incomes for individuals identifying as white living on these same reservations are not significantly affected. I argue this is consistent with political, social and economic withdrawal and indicative of mistrust of government among a particular identity group due to historical wrongs. I provide evidence as to whether the measures of withdrawal I use can explain worse economic conditions faced by American Indian individuals living on reservations where bands were forced to co-exist.
  • Item
    Essays in Agricultural Economics: Global Warming, Carbon Dioxide, and Productivity
    (2022-07-22) McLachlan, Brennan A.; van Kooten, G. C.
    Climate change has sparked growing interest in the relationship between food security and our climate systems. Crop productivity is tightly correlated with fluctuating temperatures, carbon dioxide (CO2), and rainfall. The purpose of this research is to examine the quantitative relationship between these factors to better understand the magnitude of global systematic risk. Econometric models are constructed for three different contexts: a global analysis of country-level crop yields is explored using a fixed-effects panel regression model; a meta-analysis of farm-level experiments exposed to varying levels of CO2 and temperatures; and a regional analysis of Saskatchewan rural municipalities using a spatial dataset of historical weather data. In summary, reduced yields occur beyond peak thresholds of temperature and rising CO2 will lead to substantial increases in yield potential and reduced water use. These relationships vary in magnitude across crop species, but the underlying direction of the relationships are the same. This research improves upon previous methods in the literature, explores novel datasets, and contributes to the estimation of climate impacts in agriculture.
  • Item
    The effects of economic and financial coursework on education attainment and EITC claims in the United States: 1998-2019
    (2021-12-17) Hunt, Jacob J. S; Jones, Maggie
    This paper examines the effects of offered and required coursework covering financial and economic topics in U.S. high schools over the past 20 years. Using a difference-in-differences framework, I look at the effects of economic and financial curricula on several post high school outcomes such as education attainment of potentially exposed groups, tax credit filing behaviour, and differences in poverty status. Analysis is done with 3 levels of geographic fixed effects; at the state level, county level, and contiguous county pairs that straddle state borders where discontinuities in coursework offerings or requirements are present. The results of this study do not suggest that potential exposure to economic or financial courses, whether they be offered or required, has any significant economic or statistical impact on education attainment for the affected population at the high school or post-secondary level. Exposure to coursework does not have a large economic impact on poverty reduction in potentially affected populations, but does result in some increase in both the likelihood of claiming the Earned Income Tax Credit, as well as the amount claimed.
  • Item
    Discrimination in the market for short term rentals: evidence from Airbnb
    (2021-08-24) Fairley, Katherine M.; Jones, Maggie
    Discrimination against people of colour in the hospitality, labour, and housing markets has been causing harm throughout the history of the United States. Examining the discrepancy in outcomes for marginalized Airbnb hosts allows me to assess whether even those considered economically successful are harmed by racial and gender bias. Using an Ordinary Least Squares and a Propensity Score Matching approach, I find Airbnb hosts who are of Asian or Hispanic origin face both price and quantity penalties, having nightly prices on average 4% lower and receiving 3 percentage points fewer booked nights in a month than listings managed by white hosts. Black Airbnb hosts face higher nightly prices and a lower quantity of bookings; however, without holding neighbourhood constant, they charge approximately 12% less per night, indicating that Black hosts disproportionately own properties in low-price neighbourhoods. I also observe an intersectionaldiscrimination penalty wherein women of colour face even higher price and quantity penalties.
  • Item
    Essays in agricultural business risk management
    (2021-08-16) Liu, Xuan; Van Kooten, G. C.
    Insurance has been considered as a useful tool for farmers to mitigate income volatility. However, there remain concerns that insurance may distort crop production decisions. Positive mathematical programming (PMP) models of farmers’ cropping decisions can be applied to study the effect of agricultural business risk management (BRM) policies on farmers’ decisions on land use and their incomes. Before being used to examine agricultural producer responses to policy changes under the expected utility framework, the models must first be calibrated to obtain the values of the risk aversion coefficient and the cost function parameters. In chapter 2, three calibration approaches are compared for disentangling the risk parameter from the parameters of the cost function. Then, in chapter 3, to investigate the impacts on production incentives of changes in Canada’s AgriStability program, farm management models are calibrated for farms with different cost structures for three different Alberta regions. Results indicate that farmers’ observed attitudes towards risk vary with cost structure. After joining the program, all farmers alter their land allocations to some extent. The introduction of a reference margin limit (RML) in the AgriStability program under Growing Forward 2 (2013-2018), which was retained in the replacement legislation until 2020, has the most negative impact on farmers with the lowest costs. The removal of RML significantly increases the benefits to low-cost farmers. Traditional insurance products provide financial support to farmers. However, for fruit farmers, the products’ quality can be greatly affected by the weather conditions during the stage of fruit development and ripening, which may lead to quality downgrade and a significant loss in revenue with little impacts on yields. Hence, chapters 4 and 5 investigate the conceptual feasibility of using weather-indexed insurance (WII) to hedge against non-catastrophic, but quality-impacting weather conditions to complement existing traditional insurance. Prospect theory is applied to analyze a farmer’s demand for WII. The theoretical model demonstrates that an increase in the volatility of total revenue and the revenue proportion from blueberries increases the possibility of farmers’ participation in WII. On the other hand, the increase in the value loss aversion coefficient and WII’s basis risk leads to less demand for WII. To design a WII product for blueberry growers to hedge against quality risk, a quality index must be constructed and the relationship between key weather conditions, such as cumulative maximum temperature and cumulative excess rainfall, and the quality index should be quantified. The results from a partial least squares structural equation modeling (PLS-SEM) show that the above goals are achievable. Further, rainfall and temperature can be modelled via a time-series model and statistical distributions, respectively, to provide reasonable estimates for calculating insurance premia.
  • Item
    Three studies in empirical applications of microeconomic theory
    (2020-09-10) Ozel, Sinan; Courty, Pascal; Gugl, Elisabeth
    This dissertation is comprised of three stand-alone articles, two of them co-authored, and one solo. The solo article, "Increases in Victim Mortality Rates in the Aftermath of Mandatory Arrest Laws: A Study in Unintended Effects" is in Part I. The first co-authored article "Teachers' Strikes and Standardized Test Scores: Impact on Performance & Participation", is in Part II. The last chapter, Part III, is already published in the journal "Information Economics and Policy" (ISSN: 0167-6245), accessible under the title "The Value of Online Scarcity Signals".
  • Item
    Regression discontinuity design with unknown cutoff: cutoff detection & effect estimation
    (2020-08-27) Khan Tanu, Tanvir Ahmed; Pretis, Felix
    Regression discontinuity designs are increasingly popular quasi-experimental research designs among applied econometricians desiring to make causal inferences on the local effect of a treatment, intervention, or policy. They are also widely used in social, behavioral, and natural sciences. Much of the existing literature relies on the assumption that the discontinuity point or cutoff is known a-priori, which may not always hold. This thesis seeks to extend the applicability of regression discontinuity designs by proposing a new approach towards detection of an unknown discontinuity point using structural-break detection and machine learning methods. The approach is evaluated on both simulated and real data. Estimation and inference based on estimating the cutoff following this approach are compared to the counterfactual scenario where the cutoff is known. Monte Carlo simulations show that the empirical false-detection and true-detection probabilities of the proposed procedure are generally satisfactory. Finally, the approach is further illustrated with an empirical application.
  • Item
    Essays on capital flows and capital controls
    (2020-05-27) Tseng, Po-Hsin; Voss, Graham M.
    This dissertation comprises four main chapters that examine issues surrounding capital flows and capital controls. Chapter 1 outlines the dissertation. Chapter 2 discusses several key themes in the literature on capital flows and capital controls. First, I discuss and compare the measures of capital flows and how they are commonly used. I show that net capital flows provide relevant information on investment-saving decisions. However, net capital flows may provide a false sense of security. Gross flows, on the other hand, provide information that is more relevant to financial stability. Second, I summarize various risks associated with capital flows into two broad categories and relate them to policy objectives against which the efficacy of capital controls is evaluated. I show that various macroeconomic risks associated with capital flows could be broadly grouped into (1) loss of export competitiveness and (2) increased financial instability. In terms of policy objectives, the main policy objectives are whether capital controls are able to (1) reduce real exchange market pressures, and (2) allow for a more independent monetary policy, (3) reduce the volume of capital flows, (4) alter the compositions of capital flows toward longer-maturity flows, and (5) reduce the frequency of disruptive adjustments such as currency crises and severe output loss. Third, I compare the framework used to document capital controls to the framework used to document capital flows. In doing so, I draw the de jure connections between measures of capital flows and measures of capital controls. Not only do the connections help one classify capital controls, but they also identify the exact types of capital flows that various types of capital controls intend to regulate. Fourth, I discuss major capital control indices in terms of the main considerations that are commonly involved to construct these indices, including (1) what to measure, (2) what asset categories to cover, (3) what data sources to use, and (4) what coding algorithms and weighting schemes to use to convert raw data to composite indices. Fifth, I compare and contrast major publicly-available capital control indices both at the world level and at a country level for selected countries (Brazil and South Korea). Finally, I synthesize studies on the effectiveness of capital controls and summarize possible factors that may have contributed to the inconclusiveness of the results from the existing studies. By surveying the literature, I find that possible factors include difficulties in (1) measuring capital controls, (2) obtaining capital flow data with high frequency, (3) standardizing the scope of capital flows, (4) addressing the selection bias problem, and (5) controlling for circumvention of capital controls and institutional quality. Chapter 3 examines whether countries with capital controls are less likely to experience capital surges and capital stops. I use a propensity score matching method to address the issue of selection bias, which arises when observations with capital controls have distinct characteristics that influence both the probability of imposing capital controls and the probability of experiencing capital surges and stops. These distinct characteristics, when not properly controlled for, can give rise to a biased estimate of the effect of capital controls. I use a propensity score matching method on a large data set of country-time observations. The data set encompasses both developed and developing countries and covers the period 1995-2016. The results of Chapter 3 show that capital controls may be effective, but only for observations that have not imposed capital controls. In addition, only capital controls that involve the use of inflow controls appear to be effective. Chapter 4 addresses why some episodes of gross inflow surges ended in financial crises. Using a common set of 53 countries that include both advanced and emerging countries, I show that both global factors (such as investors’ risk aversion) and domestic factors (such as domestic credit growth, foreign exchange reserves, institutional quality, and capital controls) play roles in explaining the endings of surge episodes. The effect of capital controls depends on a country’s institutional quality. For countries with lower institutional quality, imposing capital controls does not decrease the probability of hard landing. Capital controls only start to contribute to a lower probability of hard landings when the institutional quality of a country is above a threshold. Chapter 5 examines the spillover effects of foreign-implemented capital controls. I propose—from a domestic country’s perspective—that foreign-implemented capital controls can affect domestic capital flows in the flowing ways. First, foreign-implemented inflow controls may reduce domestic outflows going into these foreign countries, due to the bilateral linkages between these foreign countries and the domestic country (the domestic-outflow-reduction hypothesis). Second, foreign-implemented outflow controls may reduce the domestic inflows from these foreign countries, again due to the bilateral linkages between these foreign countries and the domestic country (hereafter, the domestic-inflow-reduction hypothesis). Third, foreign-implemented inflow controls may deflect capital flows—originally going to these foreign countries—to the domestic country (hereafter, the deflection hypothesis). The findings of this chapter support the existence of spillover effects. For the three hypotheses, I find that tightening of foreign-implemented inflow controls—measured by increases in trade-weighted and geographic-proximity-weighted inflow control indices of other countries in the rest of the world—reduces domestic outflows, while tightening of foreign-implemented outflow controls—measured by increases in trade-weighted and geographic-proximity-weighted outflow control indices of other countries in the rest of the world—reduces domestic inflows. In addition, tightening of inflow controls implemented in foreign countries—measured by finance-weighted capital control indices of other countries in the rest of the world—divert capital inflows away from the domestic country. The results suggest that foreign-implemented capital controls have signaling effects on domestic capital flows via common lenders. When one country implements inflow capital controls, the policy actions prompt the common lenders to perceive that other countries with similar borrowing patterns are likely to become less supportive of foreign investment. As such, global investors retreat their investment, leading to reductions in domestic inflows.
  • Item
    Essays on foreign aid and macro-economic performance of Sub-Saharan African countries
    (2019-05-01) Saleh, Omar; Kumar, Alok
    Foreign aid is a major flow of income into sub-Saharan African (SSA) countries, averaging roughly 12% of GDP over the last four decades. Yet, SSA countries are characterized by very low per capita output, low human capital attainment, and widespread poverty. This dissertation investigates the macroeconomic and welfare effects of foreign aid to SSA countries. The empirical part of the dissertation studies 22 SSA countries, and uses a cointegrated vector autoregressive analysis (CVAR). This methodology identifies long-run effects without imposing strong statistical priors. I introduce tradable and non-tradable sectors into the analysis to determine if the so-called “Dutch Disease” is the reason for the plight of SSA countries. “Dutch Disease” occurs when a positive shock to foreign aid perversely reduces GDP, by decreasing the relative price of tradable to nontradable goods, thus reducing the size of the tradable sector. While I find that aid reduces GDP in eight countries, this result is inconsistent with the “Dutch Disease” as it is not accompanied by large relative price changes. The analysis controls for a number of country-specific characteristics including extraordinary events. Overall, I find non-positive impacts of foreign aid on GDP and the tradable sector, with a few exceptions. I also consider the reverse causal channel and test whether country-specific macroeconomic variables drive foreign aid flows. I find that GDP, tradable output, and tradable and non-tradable goods prices do affect the amount of aid a country receives in 15 countries. These variables have no impact on foreign aid (aid is considered as weakly exogenous) in six countries. The theoretical part of the dissertation develops two dynamic stochastic general equilibrium — real business cycle — (DSGE-RBC) models to analyze the effects of foreign aid on human capital investment and the business cycle. The distinguishing feature of the models is to embed a human capital investment in a small open economy model of Mendoza (1991). The first model considers one-sector DSGE model, which is followed by two-sector (tradable and non-tradable) DSGE model. Both models distinguish between physical and human capital investment and allow for labor-leisure choice. In the analysis, labor supply and time spent studying or acquiring skills are optimally chosen. The models are calibrated to match the key features of the Kenyan economy. In both models, a positive aid shock initially has a negative impact on labor supply and output. However, the shock subsequently has a positive effect on physical and human capital investment, and time spent studying. This is due to a positive income effect from the shock. A rise in foreign aid increases consumption; consumption smoothing across periods raises physical and human capital investment, labor productivity, and output. I also find that reducing the volatility of aid has a significant positive effect on human capital investment and welfare. Policymakers should focus on reducing the volatility of foreign aid and not solely concentrate on the average level of aid. The analysis of the two-sector DSGE-RBC model incorporates the role for the “Dutch Disease” mechanism. Consistent with the “Dutch Disease”, I find that a shock to foreign aid appreciates the relative price of non-tradable goods that causes the factors of production to reallocate from the tradable sector to the non-tradable sector, leading to a decline in GDP and the tradable output. Finding the “Dutch Disease” result here is not necessarily at odds with the CVAR estimation results as the DSGE-RBC simulation is a short-run analysis and the CVAR estimation is a long-run analysis.
  • Item
    The Dust Bowl and American elections
    (2018-08-31) Alam, M Injamam; Gillezeau, Rob
    This paper examines the American Dust Bowl to understand the political impacts of the catastrophe which devastated the American Plains during the 1930s. I use county-level panel analysis to analyze whether the Dust Bowl led to a change in voting patterns in more eroded counties compared to less eroded counties. I look to see whether, in the years following the Dust Bowl, there was shift in vote shares against the Democratic Party who were typically the incumbents during the period of the Dust Bowl. I use presidential, congressional, senatorial and gubernatorial election return for approximately the three decades following the Dust Bowl, i.e. between 1940 and 1968. My results show that the Dust Bowl is associated with a shift away from the Democratic Party for more affected counties. I find these effects to last for at least a decade (throughout the 1940s). I also look at the potential effects of the net migration and New Deal expenditure in the Plains. I find that less net migration may have been one of the reasons behind this change in voting behavior of counties and that New Deal expenditure could potentially have been a strong mitigative tool for the Democratic Party.
  • Item
    The effect of deposit insurance on the Canadian banking system
    (2018-06-08) Hotsko, Nicholas; Schure, Paul
    This paper empirically estimates the impact of the deposit insurance coverage changes on deposit levels and growth. The analysis is based on a Canadian dataset from a variety of sources. It covers quarterly data on deposits by province and by type of banking institution over the period of 1997-2011. During this period there were eight deposit insurance coverage changes. I employ a triple difference in difference estimation strategy to take advantage of changes in coverage levels between and within provinces. I find that in a year following a provincial regulator increases the deposit insurance coverage level to unlimited, credit unions in that province experience higher deposit levels than chartered banks in that province, and credit unions in provinces with lower deposit insurance coverage limits. I also find that during the 2008 financial crisis, credit unions in provinces with unlimited coverage had higher deposit levels.
  • Item
    CPU product line lifecycles: econometric duration analysis using parametric and non-parametric estimators
    (2018-04-30) Fisher, Mischa; Stewart, Kenneth G.
    This thesis provides a comprehensive history of the statistical background and uses of survival analysis, and then applies econometric duration analysis to examine the lifecycles of product lines within the microprocessor industry. Using data from Stanford University's CPUDB, covering Intel and AMD processors introduced between 1971 and 2014, the duration analysis uses both parametric and nonparametric estimators to construct survival and hazard functions for estimated product line lifetimes within microprocessor product families. The well-known and widely applied non-parametric Kaplan-Meier estimator is applied on both the entire sample as a whole, and segmented estimate that considers product line lifecycles of Intel and AMD separately, with median survival time of 456 days. The parametric duration analysis uses both the semi-parametric Cox proportional hazard model, and the fully parametric accelerated failure time model across the Weibull, Exponential and Log-Logistic distributions, which find modest association between higher clock speed and transistor count on diminishing expected time in the marketplace for microprocessors, while the number of cores and other attributes have no predictive power over expected survival times. It is expected that the transistor count and clock speed of a given processor's negative effect on expected duration, likely captures the co-trending of growth in transistor count with a larger marketplace and broader product categories.
  • Item
    A time series analysis of price formation in power markets
    (2018-03-14) Khan, Ibrahim; Clarke, Judith A.
    This study examines price formation in one of the largest wholesale electricity markets in the world: the Pennsylvania Jersey Maryland Interconnection, which serves 13 states and the District of Columbia with over 60 million consumers. The contribution of this thesis is to apply a variety of time series models offered in the literature to a large data set describing a single market, allowing for a comparison of their performance as well as demonstrating their validity. A central question that drives market deregulation is if it has created efficiency gains. To formalize this notion of efficiency, we implement tests for stationarity to measure the degree of randomness over time, finding that short run volatility can result in the outcomes for these tests that are inconclusive. We explore this volatility structure using Asymmetrical Power Autoregressive Conditional Heteroskedastic (APARCH) framework which captures the asymmetric nature of price shocks, finding that this behavior is unique to electricity returns, and that APARCH offers a better modelling alternative than simpler representations. Additionally, we account for long memory given the seasonal drivers of electricity prices which are persistent using Autoregressive Fractionally Integrated Moving Averages (ARFIMA). Temperature related market drivers are further modelled using Fourier based seasonality functions which enable us to capture cycles over multiple frequencies. Lastly, we provide an application of Markov Regime Switching models to account for the possibility of multiple states. Although appealing from a theoretical perspective, we find that the increased complexity of the model does not necessarily translate to better performance over simpler non-switching alternatives. These findings highlight the importance of establishing the features of the time series before selecting an appropriate model, and motivating it with economic rationale.
  • Item
    Bivariate extreme value analysis of commodity prices
    (2017-04-21) Joyce, Matthew; Giles, David E. A.
    The crude oil, natural gas, and electricity markets are among the most widely traded and talked about commodity markets across the world. Over the past two decades each commodity has seen price volatility due to political, economic, social, and technological reasons. With that comes a significant amount of risk that both corporations and governments must account for to ensure expected cash flows and to minimize losses. This thesis analyzes the portfolio risk of the major US commodity hubs for crude oil, natural gas and electricity by applying Extreme Value Theory to historical daily price returns between 2003 and 2013. The risk measures used to analyze risk are Value-at-Risk and Expected Shortfall, with these estimated by fitting the Generalized Pareto Distribution to the data using the peak-over-threshold method. We consider both the univariate and bivariate cases in order to determine the effects that price shocks within and across commodities will have in a mixed portfolio. The results show that electricity is the most volatile, and therefore most risky, commodity of the three markets considered for both positive and negative returns. In addition, we find that the univariate and bivariate results are statistically indistinguishable, leading to the conclusion that for the three markets analyzed during this period, price shocks in one commodity does not directly impact the volatility of another commodity’s price.