The Covid-19 epidemic has caused some of the largest - and fastest - market dislocations in modern history. Contemporaneous with the significant fall in equity market values is the evaporation of market liquidity. We document the evolution of transactions costs, depth and rewards to liquidity suppliers across a variety of countries affected by the virus. We show that transactions costs increase sharply in a coordinated fashion across global markets, with depth drying up almost overnight. The withdrawal of global liquidity suppliers is correlated with the increase of over 400\% in margin requirements, driving a pro-cyclical downwards liquidity spiral. These affects are shown to be concentrated in securities most exposed to electronic market-makers.
Keywords: Covid-19; Margin requirements; Stock market liquidity
JEL classifications G01; G12; G14; G15;
We provide comprehensive, gender-based estimates of the performance of primary insiders' non-routine trades on the Oslo Stock Exchange. Regardless of gender, the time-series of insider holdings fail to indicate that insiders "buy low and sell high". However, there is evidence that the dramatic increase in the network of female directors following Norway's 2005 board gender-balancing law has increased the market reaction to female insider purchases. Moreover, female insider purchases spike following the market crash in 2008, both absolutely and relative to male insiders, which contradicts the conventional view that females are more risk averse than males.
Rune Dahl Fitjar, UiS Business School, University of Stavanger
The administrative boundaries of the central city almost universally cover a smaller area than its functional boundaries. As mobility patterns go mainly into the central city, local governments in central cities supply public goods beyond their own residents. They should want to extend their boundaries in order to internalize more of these externalities, while suburban municipalities should oppose this. This implication is clear from a theoretical perspective, but can rarely be tested given that local government reform is infrequent and typically top-down. However, the 2014-2017 Norwegian municipal reform offers a rare opportunity for empirical evidence to test this proposition. The paper examines the merger decisions made by municipalities in all city regions in Norway. The analysis provides support for the proposition that central cities want to internalize more of the externalities from their public goods production, while suburban municipalities oppose this: First, central cities tend to have higher property tax rates and to provide more public goods compared to suburban municipalities. Second, central cities were much more interested in merging than suburban municipalities: while the central cities wanted to merge with a total of 75 suburban municipalities, only 15 of the latter were positive to merging with the central city.
Keywords: Municipal reform, city regional governance, Norway, interjurisdictional spillovers, city-suburb amalga
JEL: H77, R51, H71, H73
Equity trading costs have been argued to have fallen to extreme lows following the introduction of automated trading. The justification is a fall in estimates of spreads, such as closing and effective spreads. A spread is however measured conditional on an expected transaction size. If transaction sizes falls, spreads fall, without necessarily implying a lowering in trading costs. We argue that much of the fall in spreads is driven by the fall in transaction size following the automation of trading. Alternative estimators of transaction costs less sensitive to trade size, such as the the Lesmond, Ogden and Trzcinka (1999), Corwin and Schultz (2012) and Abdi and Ranaldo (2017) estimators, show much less of a downward trend. Using transaction by transaction data for the Norwegian equity market for the period 1999 to 2016, we show that the lowering of spreads is driven by the decline in order sizes.
In this paper, we have estimated hotel revenue functions at the regional level in Norway. The purpose is to investigate the effects of the oil price collapse on tourism demand. The oil industry is a dominant economic sector in Norway. Its high demand for economic resources has inflated the general price level nationally. A side effect is that the Norwegian tourism industry has struggled with poor price competitiveness. We find the downfall in oil revenues caused by the fall in crude oil prices has boosted tourism growth through a weakening of the local currency, Norwegian kroner. This result suggests that a subset of rich countries where wealth inflate prices of tourism services can have problem in developing its tourism industry.
I januar i år leverte jeg, sammen med Professor Magnus Dahlquist ved Handelshogskolan i Stockholm, en uavhengig evaluering av Norges Bank sin forvaltning av Statens Pensjonsfond Utland (oljefondet, eller bare fondet). Evalueringen ble gjort på oppdrag av Finansdepartementet. I rapporten er det tekniske nivået relativt høyt, analysen er rettet mot spesialister i porteføljeforvaltning. I denne artikkelen forsøker jeg å gjøre hovedpunktene tilgjengelige også for mer generelt interesserte samfunnsøkonomer. Jeg konsentrerer meg om våre analyser av avkastning.
Project investment size is frequently used to explain cost overruns, but the literature is inconsistent with regard to its effect. This inconsistency might be caused by the idiosyncratic property of projects coupled with the use of ordinary least square estimation. Through a Monte Carlo simulation and an empirical example using data from offshore oil and gas projects on the Norwegian continental shelf (NCS), I show that the more efficient least absolute deviation estimation approach is more appropriate for inferring the relationship between project size and cost overruns.
The recent five years have seen a nearly tenfold increase the salmon stock price index at the Oslo Stock Exchange. This paper tries to shed some light on the reasons why this substantial stock price appreciation has occurred. The primary aim is to ascertain if the market valuation of salmon farming companies can be explained by rational factors, or there is an element of irrational exuberance behind current all-time high salmon stock prices. In particular, we examine the impact of both fundamental and operational value drivers. The results suggest that a structural shift has occurred, leading to a stronger association between fundamentals and market valuations after 2012, suggesting that at least some of the stock price increase is linked to fundamental factors.
Keywords: salmon company valuation, price-to-book ratio, valuation multiples, salmon price, salmon aquaculture, salmon farming
This paper looks at IPO underpricing in the shipping sector. This sector is of interest as it has unique characteristics, among them pro-cyclicality, long history, and ownership concentration. Moreover, the average level of underpricing in shipping is reported to be substantially lower than the overall level. The effects of shipping-specific factors on underpricing are exhaustively studied in this paper for the first time. In connection with shipping characteristics, we hypothesize sev- eral underpricing theories to be relevant explanations of underpricing in the shipping sector. More specifically, we investigate an investor sentiment theory as shipping is highly exposed to business cycles; an information asymmetry argument as there seems to be low information asymmetry in shipping; and two ownership and control theories, namely, the Brennan and Franks managerial control theory and the Stoughton and Zechner agency cost theory, due to the highly-concentrated ownership prevalent in the shipping sector. In addition, we consider a partial adjustment theory that has gained substantial empirical support in the literature. In order to test the aforementioned theories and shipping-specific factors, we perform a cross-sectional regression analysis using a sam- ple of 60 shipping IPOs from four different stock exchanges. The partial adjustment theory and the Stoughton and Zechner agency cost theory are supported by the results, while the investor sen- timent theory, information asymmetry argument, and the Brennan and Franks managerial control theory are rejected. Importantly, the Stoughton and Zechner theory and downward price revisions prevalent among shipping firms can partially explain the low underpricing “puzzle” in shipping. The robustness of the obtained empirical results is verified using a control sample of non-shipping IPOs.
Keywords Initial Public Offering; IPO underpricing; Shipping sector; Partial adjustment theory; Investor sentiment theory; Stoughton and Zechner theory.
JEL Classification: G3
Regional innovasjonspolitikk kan handle om en politikk som er regionalt utformet, som er differensiert for å tilpasses de lokale forholdene i regionen, eller som er opptatt av å stimulere til regionalt samarbeid og kunnskapsutveksling. Når man snakker om en regional innovasjonspolitikk, er det viktig å forstå hvilke(n) av disse dimensjonene regionaliseringen skjer innenfor. I Norge har innovasjonspolitikken blitt mer regional i alle disse dimensjonene, men dette er ikke den eneste mulige, eller en gang den mest ønskelige, utviklingen. Det viktigste er at politikken er regionalt differensiert, ettersom ulike regioner har behov for ulike tiltak. Derimot bør politikken ikke primært stimulere til samarbeid innad i regionene, men tvert imot bidra til at aktørene samarbeider og utveksler kunnskap med et stort antall partnere, også utenfor regionen og landets grenser. Dette vil gi tilgang til en bredde av ny kunnskap og ulike perspektiver.
Nøkkelord: Innovasjon, politikk, regionalisering, desentralisering, samarbeid
JEL-klassifisering: O38, R58, H77
Med stort økonomisk verdipotensial og regionale ringverknadar i form av næringsutvikling og sysselsetting kan dei delte meiningane rundt olje‐ og gassverksemd i Lofoten, Vesterålen og Senja kanskje fortone seg som gåtefulle. Basert på diskonterte kontantstraumer frå olje‐ og gassressursane i området konkluderer denne analysen med at opning for olje‐ og gassverksemd av Lofoten, Vesterålen og Senja er potensielt viktig for olje‐ og gassnæringa, medan implikasjonane for statsfinansar og kapasitet til offentleg tenesteyting er mindre. Analysen indikerer at vern av området kan innrømmast til ein årleg kostnad på om lag 700 kroner per innbyggar.
Nøkkelord: Olje‐ og gassutvinning, makroøkonomi, modellering
JEL‐klassifisering: H27, Q35, Q38
We study the diversification properties of equity portfolios using data on all Norwegian households with equity investments. While households typically have undiversified equity portfolios, diversification is increasing in wealth.
Keywords: Household Finance; Equity Portfolio Diversification
JEL Codes: D14; G02; G11;
We characterize the equity holding periods for all equity owners in a stock market over a 15 year period. The median holding period is 0.75 years. The hazard function for equity ownership is characterized by negative aging, an equity owner is less and less likely to realize a position as time passes. There are clear differences between owner types, where private individuals have the longest holding periods, and financial owners are the least patient. Wealthier households have shorter holding periods. Using turnover to estimate holding periods severely over-estimates actual holding periods.
Keywords: Equity Holding period; Duration; Failure Time; Survival
JEL Codes: D14; G11; G12
The recent dramatic fall in oil prices has led to extensive capital rationing in international oil companies, and subsequent fierce competition between resource extraction countries to attract scarce investment. This situation is not adequately addressed by the large literature on international taxation and multinational companies, since it fails to take account of capital rationing in its assumption that companies sanction all projects with a positive net present value. The paper examines the effect of tax design on international capital allocation when companies ration capital. We analyse capital allocation and government take for four equal oil projects in three different fiscal regimes: the US GoM, UK upstream and Norway offshore. Implications for optimal tax design are discussed.
Key words: Taxation, international companies, project metrics, project valuation, oil projects
JEL classification: H21; H25; F23; Q4, G12, G31
The Basel Committee’s minimum capital requirement function for banks’ credit risk is based on value at risk. This paper performs a statistical and economic analysis of the consequences of instead basing it on expected shortfall, a switch that has already been set in motion for market risk. The empirical analysis is carried out by means of both theoretical simulations and real data from a Norwegian savings bank group’s corporate portfolio. Expected shortfall has some well known conceptual advantages compared to value at risk, primarily a better ability to capture tail risk. It is also sub-additive in gen- eral, thus always reflecting the positive effect of diversification. These two aspects are examined in detail, in addition to comparing parameter sensitivity, estimation stabil- ity and backtesting methods for the two risk measures. All comparisons are conducted within the Basel Committee’s minimum capital requirement framework. The findings support a switch from value at risk to expected shortfall for credit risk modelling.
Keywords: Expected shortfall, credit risk, bank regulation, Basel III, tail risk
We give some basic empirical characteristics of the Oslo Stock Exchange in the period after 1980. We give statistics for number of firms, the occurences of IPO's, dividend payments, trading volume, and concentration. Returns for various market indices and portfolios are calculated and described. We also show the well known calendar anomalies, the link between number of stocks in a portfolio and its variance and industry characteristics of the OSE.
Salmon farming companies are increasingly gaining attention from investors and portfolio managers. The last decade has seen a substantial growth in the securitization of salmon farming assets and prices. A growing literature demonstrates that industry-specific fundamental, as well as market-wide risk factors help explain stock returns. However, very little is known about the pricing of salmon stocks and especially the contribution of industry-specific fundamental risk factors. Using a multifactor model, we find that stock returns for salmon farming firms are significantly associated with both common market-wide risks and industry-specific risk factors.
Keywords: Atlantic salmon production, salmon company valuation, stock returns, risk factors, salmon price.
JEL codes: G12; G31; Q02; Q14
We characterize the liquidity of bond trading at the Oslo Stock Exchange (OSE). We use the complete history of bond prices quoted at the OSE from 1990 to 2015.
We first characterize the market place, summarize trading grouped by type of issuers. The OSE can be characterized as a market place with a few bonds traded often, the rest traded seldom. The active bonds are Treasury securities, which typically trade on a daily basis. A second category of active bonds are \emph{covered bonds}, a type of bond introduced as recent as 2008 (in the wake of the financial crisis). The remainder of bonds at the OSE are traded seldom. The activity of the bond market at the OSE has increased markedly in the post-2008 period. While Treasury securities remain the most active class, covered bonds has seen a marked increase in liquidity. We also see an increase in activity for the other bond groups. The number of bonds listed has doubled in the last ten years, with financial and industrial issuers increasing the most. The market had more than 3000 different bond issues active in the last five years. However, only half of these bonds trade more than five times a year.
The second part of the paper investigates the feasibility of measuring liquidity in the Norwegian bond market. Is it possible to construct liquidity measures that are informative about the state of the Norwegian financial market? We calculate three different measures that can be calculated from daily data: Bid/Ask Spreads, the Amihud [2002] ILLIQ measure, and the Corwin and Schultz [2012] spread estimate from high/low prices. Except for Treasuries, the liquidity measures are hard to calculate due to limited trading interest. Of the three liquidity measures, the Corwin and Schultz measure seem to be the preferred, although the measures are clearly correlated.
All measures show that aggregate bond market liquidity covary with slowdowns in the Norwegian economy, with liquidity worsening (trading costs/spreads increasing) around such events as the 1992 Banking Crisis and the 2008 Financial Crisis.
We also compare estimates of trading costs for various types of bonds with equities, and find that the most expensive to trade is equities. Trading costs for corporate bonds are lower than equities, but higher than Treasury bonds, which is the category with lowest estimated transaction costs. This is contrary to the evidence from the US, and most European bond markets, where estimates of transaction costs for corporate bonds are much higher than trading costs for equities.
Keywords: Bond Markets; Liquidity; Trading Costs; Oslo Stock Exchange
JEL Codes: G10; G20
We explore an event where three stock exchanges (Chi-X, Turquoise, BATS Europe) in 2009 reduced their tick sizes (the minimum price increment in the limit order book) for stocks with a primary listing at the Oslo Stock Exchange (OSE). The OSE quickly responded by reducing its own tick sizes, before all markets agreed on a common tick size structure. Consistent with recent theoretical work by Buti, Consonni, Rindi, Wen and Werner (2015), we find that markets with small tick sizes capture market shares. However, inconsistent with Buti et al, we find little evidence that the observed changes to market shares are due to cross-market differences in tick size constraints. Instead, our empirical results suggest that the tick size affects the distribution of market shares through its impact on the trading behavior of high-frequency traders. Finally, we find that tick size reductions appear to have negative spill-over effects on the stock liquidity in markets that keep larger tick sizes.
Keywords: Equity Trading; Limit Order Markets; Tick Sizes; High Frequency Trading
JEL Codes: G10; G20
Arikkelen vurderer utviklingen i likviditeten i det norske statsobligasjons- markedet i perioden 1999-2015. Markedet omfatter en elektronisk ordrebok og et telefon- og internettbasert marked. Med et nytt og omfattende datasett som inkluderer alle ordrebokdata og transaksjoner rapportert til Oslo Børs beregnes en rekke indikatorer som re‡ekterer de ulike dimensjonene av likviditesbegrepet. Resultatene viser at likviditeten for markedet sett under ett var best på første halvdel av 2000-tallet, forverret seg etter finanskrisen, men har bedret seg igjen de siste årene. Likviditeten i ordreboken har, ifølge flere indikatorer, økt gjennom perioden til tross for at antall markedsaktører, utestående ordre og transaksjoner har gått markert ned.
This paper investigates whether establishing an electronic limit order book (LOB) in a current over-the-counter (OTC) bond market will move the price discovery process onto the new venue and if so, whether informed traders supply or demand liquidity. A detailed data set from the hybrid Norwegian government bond market shows that informed dealers prefer market orders in the LOB. The results further show that uninformed dealers tend to provide liquidity to informed dealers. Informed dealers’ preference for speed can reflect that limit orders and OTC trading are exposed to waiting costs which can be substantial in many bond markets. These findings suggest that recently proposed pre-trade transparency requirements will contribute to a more effcient price discovery process in current OTC bond markets and that an incentive scheme for liquidity suppliers could enhance it further.
JEL Classification: G12, G14, G17.
Keywords: Bonds, informed dealers, order flow
We investigate empirical links between the Oslo Stock Exchange (OSE) and the weather, asking whether daily returns on the market, or market trading activity, seems to be related to the weather. We find a positive correlation between the OSE and two measures of ``bad weather'': clouds and windchill. High windchill is also associated with low market liquidity.
Keywords: Weather; Stock Returns; Oslo Stock Exchange; Behavioral Finance
JEL Codes: G14
Researcher-level metrics assess a researcher’s publications and number of citations for each publication. This paper tests empirically 28 two-variable metrics, 26 of which are new in this paper, determined as geometric means from eight one-variable metrics. The 54 highest ranked researchers in RePEc are considered, 13 of whom are Nobel prize winners. One new one- variable metric, the number of citations for the 10 th most cited publication, is introduced. Characteristics of the eight one-variable metrics are considered, illustrating why two-variable metrics are needed. The 54 researchers are ranked for all 36 metrics. The lowest sum of ranks for the 13 Nobel prize winners occurs for metric c 1 , the number of citations for the highest cited publication. The 13 Nobel prize winners have on average 5.3 higher rank on w than on h, suggesting a need for being widely cited, not captured by the h -index. The metric √nc, the square root of the product of the number of publications and the citation count, proposed as an interesting metric, correlates best with the RePEc scores. Correlations between the 36 metrics are determined. The 28 two-variable metrics are tentatively ranked according to how they capture characteristics apparently not captured by the one-variable metrics.
October 31, 2016
Keywords: Scientific impact indices, metrics, indices, research output, ranking, publications, citations, RePEc
JEL Classification Numbers: A12, A14
The oil and gas sector plays a crucial role in the Norwegian economy. It accounts for a very large proportion of gross domestic product, government revenues, investment and exports. A sharp fall in oil prices has had a significant impact on the economy and focused great attention on the cost side of the sector. Enhancing cost efficiency and curbing cost overruns now top the agenda. It is not difficult to find examples of projects suffering extensive cost overruns. What factors underlie these overruns? Media coverage might easily give the impression that Norway’s oil and gas sector is suffering from a lack of ability and competence to plan and execute projects to budget. Is this reputation deserved? Does the oil sector perform more poorly in Norway than in other producer nations? Can we see learning effects? How do the Norwegian and the international oil industry compare with other industries with respect to cost performance?
Keywords: cost overrun, petroleum industry, experience, comparison
JEL. Class. No.: D22, D24, G31
Abstract
We investigate the potential for statistical forecasting of aggregate oil and gas investment on the Norwegian Continental Shelf (NCS). A unique and detailed dataset containing data from 109 different fields on the NCS between 1970 and 2015 was employed. A set of 1080 autoregressive distributed lag models are evaluated pseudo out-of-sample and tested for data mining by utilizing a Diebold-Mariano hypothesis test and the model confidence set procedure by Hansen and Lunde (2011). The main results are as follows. First, we find that it is indeed possible but challenging to outperform the parsimonious random walk benchmark in an out-of-sample environment. Second, lags of investment growth, crude oil price growth and realized volatility is found to be adequate predictors for the investment growth. Finally, there is a clear benefit from re-estimating the models coefficient at every step.
Keywords: Investment, oil and gas sector, Norwegian Continental Shelf, pseudo out-of-sample forecasting
Jel. class.no.: C31; C52; D22; D92; E17; E22; E27; G31
Keywords: Rent seeking, group, additive efforts, Cobb-Douglas, axiomatization, contest success function.
JEL Classification Numbers: C70, D72, D74
Group contest success functions are axiomatized for general production functions, focusing particularly on the additive production function and the multiplicative Cobb-Douglas production function. Essential for axioms supporting the additive production function, driven by substitutability across efforts, is the sufficiency of only one group member exerting effort. Essential for axioms supporting the multiplicative production function, driven by complementarity across efforts, is that all group members exert efforts. The additive production function is further supported by an axiom where adding an amount to one effort and subtracting the same amount from a second equivalent substitutable effort does not change the winning probabilities. The Cobb-Douglas production function is supported by a strong homogeneity axiom where an equiproportionate change in matched group member’s efforts does not affect the winning probabilities.
Keywords: Cost overruns, petroleum projects, business cycle, oil price
JEL. Class. No.: D22, D24, G31
Development projects in the oil industry often have cost overruns. Through analysis of data from Norwegian development projects in the petroleum industry, this paper investigates the common effect of business cycle developments on cost overruns. Lack of capacity and expertise in a tight supplier market yield cost inflation and difficulties in managing projects. Unlike previous analyses of cost overruns, we analyse projects over a long time period to capture the cyclical effects. We document a statistically significant positive relationship between oil price developments and cost overruns, with shocks or surprises to the oil price during the project implementation having a larger impact on cost overruns than the oil price level itself. Cost overrun ultimately leads to reduced competitiveness for the industry, and we discuss consequences and policy implications for business and society of these cost overruns.
Since the turn of the century The International Energy Agency (IEA) has assumed a gradually more important role in defining the agenda and outlook for energy and climate policies. This essay reviews the methodology and methods behind IEA’s World Energy Outlook, and then offers a critical review of assumptions and projections, focusing in particular on the outlook for economic growth, technological change, and investment in new renewable energy. The analysis suggests that important aspects of IEA’s scenarios are driven by critical exogenous assumptions. Moreover, vast resources and a competent research organization offer limited mitigation for outlook uncertainty, and IEA’s outlook should therefore be approached with the same caution as other global energy projections.
Keywords: Energy economics, macroeconomics, modelling
JEL classification: Q41, Q43, Q47
The recent fall in oil prices has led to extensive capital rationing, and thereby given rise
to a renewed focus on parameters for project selection which supplement net present
value. While the financial crisis was creating capital constraints, the oil industry seemed to
be paying great attention to the net present value index. The metric most often referred to at
present, given the prevailing uncertainty over the direction of future oil prices, seems to be
the breakeven price of a project. Management and professionals in the oil and gas sector, as
well as industry analysts, appear to be very concerned about which criteria in addition to net
present value other companies are applying in their decision-making. Our findings indicate
that they can be more relaxed here, since the various supplementary criteria provide very
similar rankings.
We examine the different investment metrics of a portfolio of oil
projects. The analysis of project metrics shows that the overall grouping of projects is the
same with the three supplementary metrics. The concentration by the companies on robustness
related to oil prices means that particular attention is paid to the breakeven price and cost
optimisation. Projects which are optimised and sanctioned may have a very high return with the
realisation of an expected price scenario. We introduce a new metric, referred to as the
complete net present value index, which improves the traditional net present value index by
including operating expenditure and by treating taxes in a consistent manner.
Key words: Project metrics, project valuation, oil projects
JEL classification: Q4, G12, G31
This paper studies how drilling costs are affected by the business cycle. We decompose the major elements in these costs – rig rates and drilling speed –- and examine how they interact with variations in oil prices. A highly relevant consideration in the current circumstances is whether oil companies can compensate for falling oil prices not only by driving down rig rates but also by stepping up drilling speeds. By constructing an econometric model for producing estimates, we find that both high rig rates and reduced drilling productivity will contribute to raising the cost of drilling in boom times, while the reverse is true when oil prices fall. This is good news for an oil industry under challenge. At the same time, the reinforcing effects of two major drilling cost components can explain some of the substantial cyclicality which characterises the oil industry.
Keywords: Drilling speed; rig rates; business cycle
JEL classification: C51; D24; E32
We examine drivers of cost overruns in Norwegian development projects in the oil and gas sector. The multivariate longitudinal econometric analysis employs a unique and detailed dataset consisting of 80 different projects between 2000 and 2015. Among the significant results, we find that the unexpected change in economic activity has a positive effect on the overruns; there is a considerable positive momentum in the transitional cost overruns; more experienced operators tend to incur less overruns; finally, that the size of the investment of the projects has a positive impact on the overruns. Further, we find evidence that the current economic activity matters to an extent, but it is the unexpected change in activity that is the pivotal factor.
Key words: Cost overrun, cost estimation, estimation error
JEL classification: C51; D22; C31
A rent seeking model is axiomatized and analyzed where players exert multiple additive efforts. An analytical solution is developed when the contest intensity for one effort equals one. Then additional efforts give players higher expected utilities and lower rent dissipation, which contrasts with earlier findings for multiplicative efforts. Players optimize cost effectively across efforts, cutting back on the effort with contest intensity equal to one, and exerting alternative efforts instead. This latter effort eventually decreases towards zero as new efforts are added. It may not be optimal for both players to exert all their available efforts. Accounting for solutions which have to be determined numerically, a Nash equilibrium selection method is provided.
Keywords: Rent seeking, additive efforts, axiomatization, contest success function, rent dissipation.
JEL Classification Numbers: C70, C72, D72, D74
Gjennom dei seinare åra har Det internasjonale energibyrået (IEA) teke ei stadig meir sentral rolle som premissleverandør for utsikter og politikk på energi‐ og klimaområdet, både internasjonalt og i Noreg. Denne analysen gir ein introduksjon til metodar, modellering og scenario‐design bak energi‐utsiktene frå IEA. Deretter følgjer ei drøfting av føresetnader og framskrivingar for økonomisk vekst, teknologiske framsteg og fornybar‐ investeringar. Analysen tyder på at viktige sider ved framskrivingane er knytt til kritiske eksogene føresetnadar. Trass i store ressursar og høg kompetanse, er usikkerheita rundt IEA sine analyser neppe mindre enn i andre framskrivingar av det globale energibiletet. Ein porsjon sunn skepsis er difor på sin plass i møtet med alle utsikter for energi og klima.
Nøkkelord: Energiøkonomi; makroøkonomi; modellering
JEL‐klassifisering: Q41, Q43, Q47
The paper presents the literature on skill relatedness and shows the results of a study on skill relatedness based on labour mobility in Norwegian industry between 2000 and 2011.
JEL codes: J62, R10.
This paper studies financial statement information from the largest oil and gas companies and evaluates their relation to firm market value. The accounting literature states that an important feature of financial statements and, in particular net income, is the usefulness for predicting future cash flows. However, financial analysts covering this sector prefer a number of alternative non-GAAP income measures to disclosed net income. Using a dataset of 72 largest integrated and exploration and production companies (E&Ps) during 1993-2013, we examine the relative value-relevance of net income versus eight alternative profitability measures. Despite the analyst preference for non-GAAP measures, our results suggest that net income is the most value relevant earnings measure for integrated oil & gas companies. By contrast, cash flow measures dominate for exploration and production companies. However, we find that free cash flow, which many oil company analysts refer to these days, has low value relevance.
Keywords: Company Valuation, Value-relevance, Financial Analysts, Oil & Gas Industry
JEL codes: M21, M40, G12, Q49
This study presents a novel approach to selecting comparable companies in equity valuation. While valuation multiples is probably the most common valuation method in practice, discounted cash flow and residual income valuation models are advocated by academics. A key aspect in valuation by multiples is peer group selection. In this paper we examine the usefulness of econometric techniques in peer-group selection for the largest companies in the international oil and gas sector. Using Chow tests we are able to identify firms with similar relationships between valuation multiples and relevant value drivers.
Keywords: Oil and gas companies, valuation, valuation multiples, peer groups
JEL codes: G12, Q33, Q35
Oil and gas reserves are the most important assets of oil and gas companies. A source of confusion for investors in oil companies is that reserves quantities and values are uncertain estimates. Reserves are typically classified according to probabilities of recovery from underground reservoirs. All U.S. listed companies have to disclose proved reserves but not probable reserves, thus leaving out potentially important information for investors and financial analysts. This study addresses the impact on market valuation of various classifications of reserves amounts. Using a data sample of 94 companies that do disclose information on probable reserves, we compare the relation between three classifications of reserves and oil company returns. While we find that information on probable reserves do not have an impact on stock returns measured over the entire time period, this is not the case since 2009, coinciding with the onset of the shale gas revolution.
Keywords: Oil and gas reserves, probably reserves, value relevance, accounting figures
This study examines the Fish Pool salmon futures contract with respect to how well the market performs in terms of the futures price being an unbiased estimator of the spot price and whether the market provide a price discovery function. Using data for 2006-2014 and with futures prices with maturities up to 6 months we find that spot and lagged futures prices are cointegrated and that the futures price provides an unbiased estimate of the spot price. We also find that, with the exception of the front month, that the causality is one-directional. The spot prices lead futures prices between 1 to 6 months maturity. Hence, while the spot and lagged futures prices are unbiased estimates, we do not find support for the hypothesis that futures prices provides a price discovery function. Rather, it seems that innovations in the spot price influence futures prices. This finding is not uncommon in new and immature futures contracts markets. Hence, the salmon futures market is still immature and has not yet reached the stage where futures prices are able to predict future spot prices.
Key words: Atlantic salmon, futures prices, price discovery
JEL codes: G13, G14, Q22
For more than 40 years oil and gas companies have been able to choose between two competing methods for accounting for exploration activities. The literature suggests that accounting method discretion can potentially signal managements' private information with the benefit of improving the relevance of accruals for forecasting future cash flows. However, if accounting method flexibility is used for financial window-dressing, accruals can lose their value-relevance and investors will resort to cash flows measures instead. In this study we compare the value-relevance of earnings versus cash flow for oil and gas companies from 1992 to 2013. Our results suggest that earnings are not significant, independent of accounting method choice, consistent with the view that accruals have limited value in the oil and gas industry. Rather, it seems that cash flow measures of both current and future profitability are significantly associated with oil company returns. These findings suggest that the financial markets lack confidence in oil company earnings, irrespective of accounting method choice.
Keywords: full cost versus successful efforts, oil and gas company valuation, petroleum accounting, value-relevance.
JEL codes: M40, Q33, G12
Oil and gas exploration companies (E&Ps) exhibit large variations in earnings due to volatile oil and gas prices. Furthermore, their primary asset, oil and gas reserves, is accumulated through highly risky exploration activities. In contrast, integrated oil and gas companies display lower variability in their earnings due a more diversified asset base. The literature suggests that companies with higher earnings volatility and higher levels of intangibles among their assets should have lower value relevance of accounting information than companies with higher levels of tangible assets on their balance sheets. For that reason E&P companies should have lower value relevance than integrated companies. Contrary to expectations, we do not find lower value relevance for E&Ps earnings than integrated oil and gas companies. In fact, the results suggest that the presence of supplementary fair value estimates for oil and gas reserves mitigate the potential problem associated with the presence of intangible assets experienced in other industries.
Keywords: Company Valuation, Value-relevance, Oil and Gas Industry, Vertical Integration
JEL codes: M21, M40, G12, Q49.
Typically, the risk premium in futures prices is examined by regressing the ex post risk premium on the ex ante spot-futures price basis. However, recent studies suggest that industry specific production factors as well as the basis can influence the relationship between spot and futures prices. The Atlantic salmon market is a market where risk associated with special production characteristics may affect the spot-forward relationship. Futures markets have recently been introduced for aquaculture products, and an understanding of the specific risk factors is important if these markets are to succeed. Using spot and futures prices as well as a set of industry specific variables, we seek to explain the variation in the risk premium in salmon futures by the variation in the basis. We find that shocks in key production variables help explain the variation in the risk premium along the forward curve.
Key words: Atlantic salmon markets, Forward prices, Risk premium
JEL codes: G13, G14, Q22
This paper examines the hedging properties of Atlantic salmon futures. Hedging is important since it allows for mitigation of the risk of adverse price changes in the spot market. We examine the hedging efficiency of three types of hedging strategies; unhedged, fully hedged and hedging using optimal hedging ratios. To find the optimal hedge ratio we use an estimated constant hedge ratio, optimal hedge ratios estimated with rolling 20-week and 52-week windows, and bivariate GARCH models. The results provide evidence that hedging using futures contracts listed on Fish Pool reduces risk for producers of farmed Atlantic salmon. The best hedging efficiency is achieved with a simple one-to-one hedge, closely followed by the bivariate GARCH approach.
Key words: Atlantic salmon markets, Forward prices, Risk premium
JEL codes: G13, G14, Q22
This paper examines how oil and gas companies' reserves growth affects their share price returns. In particular we examine three issues affecting the relation between reserves changes and oil and gas firm returns. First, we examine if investors value reserves replacement as a result of exploration activities differently to reserves growth through acquisitions. In the second analysis we test if reserves replacement of oil reserves impacts stock returns differently than changes in gas reserves do. Third, we examine the impact of the Shale gas revolution and the subsequent oil and gas price divergence on the association between returns and replacement of oil versus gas reserves. The results suggest that investors seem to be indifferent to reserves replacement strategy (exploration or acquisition). However, we find that changes in oil reserves impact oil and gas company returns differently than changes in gas reserves does. Moreover, we find that there has been a structural shift in the relation between returns and changes in gas reserves (but not changes in oil reserves) after 2008, coinciding with the Shale gas revolution and the break in the oil-gas price link. This latter result can be relevant for understanding the impact of the recent fall in oil prices on investor valuation of oil and gas reserves.
Key words: Oil and gas reserves, reserves replacement, stock returns
JEL codes: Q33, Q35, G12
Since 2008, the U.K. natural gas market has witnessed a marked drop in volatility. This fall has coincided with specific events in oil and gas sector such as the onset of the U.S. "shale gas revolution" and the subsequent rerouting of liquefied natural gas (LNG) shipments from the U.S. to other markets such as Asia and Europe. LNG cargoes, along with other sources of flexibility such as underground storages and interconnector import, can potentially reduce volatility. On the other hand, demand shocks can increase volatility. To examine the dynamics relationship between daily shocks in U.K. gas demand and supply, and the gas spot price volatility, we use a vector autoregressive (VAR) model . While we find evidence that daily deviations in aggregated gas demand significantly impacts volatility, we are unable to find direct evidence for an impact from shocks in disaggregated demand or supply. In fact, one important contribution of the paper is to suggest that flexible sources of supply such as LNG, storage and interconnector flows react to shocks in retail demand, dampening their potential effects on volatility.
Keywords: UK gas market, volatility, LNG, GARCH, vector autoregression
JEL classification: Q4, Q31, G13
This paper addresses the issue of credit risk in the salmon industry. During the period 2000-2002 the Norwegian salmon industry witnessed a period of low prices leading to a wave of defaults and bankruptcies. The consequences were large monetary losses for both investors and banks, highlighting the importance of early detection of failing firms. Using financial ratios measuring the firms' financial status prior to this event, two credit risk models are developed; one using logit regression and the other Classification and Regression trees. The performance of the two models developed is compared to a cross-industry benchmark model developed by the Norwegian Central Bank. The models estimated on industry data is better at separating between companies with high and low credit risk in the salmon industry compared to the benchmark model.
Keywords: Atlantic salmon production, credit risk, default probability models, logit, Classification and regression trees.
JEL codes: G170, M49, Q22
Artikkelen gir en kortfattet oversikt over metoder for empirisk evaluering av porteføljeavkastning og aktiv fondsforvaltning. Metodene illustreres ved hjelp av avkastningen på Finansavisens Innsideportefølje (en smal portefølje hvor avisen plukker aksjer basert på siste ukes registrerte innsidehandel). De empiriske suksessmålene inkluderer Sharpe-raten, informasjons-raten, regresjons-alfa etter justering for eksponering (beta) mot risikofaktorer, tidsvarierende risiko eksponering, og bruk av porteføljevekter. Sistnevnte viser mer direkte enn regresjonsanalyser hvorvidt forvalteren «kjøper lavt og selger høyt». Vi diskuterer også hvorfor markedseffisiens og handlekostnader gjør det svært vanskelig for nesten enhver aktiv fondsforvalter å realisere positiv risikojustert meravkastning («slå markedet»). Disse vanskelighetene forsterkes for store fond med delvis predikerbare porteføljevekt-endringer -- som f.eks. det norske Oljefondet.
Keywords: Game theory, sensitivity analysis, economic risk, default, contagion
JEL Classification Codes: C6, C7, G01
A game theoretic model of six kinds of players, i.e. countries, central banks, banks, firms, households, and financial inter-governmental organizations. Each player has a strategy set, with strategies such as setting interest rates, lending, borrowing, producing, consuming, investing, importing, exporting, defaulting, and penalizing default. Markets for goods, debt, and capital are modeled endogenously. This rich conceptualization of strategic opportunities for as many as six types of players is richer than anything that has been attempted earlier. The 2005-2011 empirical data for Greece is used to analyze how utility is impacted by public consumption and lump sum transfers, assuming negative productivity shocks, analyzing several time periods, with and without the possibility of default. The 2007-2008 empirical data for Greece and Germany is used to determine how the two countries’ utilities depend on Greece’s public 2007 consumption, with and without negative productivity shocks. Greece’s2 high debt burden is shown to make default optimal with high shock magnitude is low default penalty. Germany has limited ability, through its available strategies, to prevent the default, and may resort to unconventional tools such as debt forgiveness and changing the default penalty.
In order to determine the optimal allocation of responsibilities in disease interventions, and in designing commitment mechanisms, the paper develops a three-period game comprising policy- makers, the international community providing financial aid, and individuals. A policy-maker chooses, in period 1, a fraction of funds to be allocated to disease prevention, and the remaining fraction is allocated to disease treatment. The policy-maker chooses additional funds provision in period 2 for disease treatment. The international community chooses funding in period 3 for disease treatment. Persons engage in risky versus safe behavior which may or may not cause disease contraction. When the international community funds, the policy-maker free rides by not funding additionally. We determine which factors impact how the policy-maker allocates funding between disease prevention and treatment. If the policy-maker funds substantially, the international community free rides by funding less. We quantify how more allocation of funds by the policy-maker to disease prevention causes lower disease contraction probability and higher probability that a person remains sick or dies, and how the international community’s funding impacts these two probabilities. We derive seven assertions from the properties of the model. The model is also tested against empirical data on Africa. The results show consistency between the theoretical model and empirical estimates.
Key Words: Public Economics, Public Choice, Health Economics
JEL kodes: C72, D72, D74.
This paper investigates the economic value of trade when prices of transportation services are endogenous to cross-market price spreads. This is relevant for liquefied natural gas (LNG) exports. LNG transportation capacity is limited in the short-run, and long lead-times are involved in extending the transportation infrastructure. We establish empirically that LNG transportation costs have been endogenous to regional gas prices spreads. As such, transportation service providers have been able to capture part of the price spread. We proceed to develop a method to value LNG exports under conditions of endogenous transportation costs and market integration. We use this method to quantify the effect of endogenous transportation costs on the value of LNG exports from the US to Japan. Our analysis shows that when transportation costs are correctly treated as endogenous, the LNG export benefit can drop by as much as 20-50% relative to the case of exogenous cost.
Keywords: LNG; natural gas; export; trade policy
JEL code: F13; Q27; Q48
When natural gas prices are subject to periodic decoupling from oil prices, for instance due to peak- load pricing, conventional log-linear models of price dynamics such as the Vector Error Correction Model (VECM) can lead to erroneous conclusions about cointegration relationships, price adjustments and equilibrium relative values. We propose the use of regime-switching models to address these issues. Our regime switching model uses price data to infer whether pricing is oil-driven (integrated) or gas-specific (decoupled). We find that UK natural gas (ICE) and oil (Brent) are cointegrated for the majority of the sample considered (1997-2014). Gas prices tend to decouple during fall and early winter, when they increase relative to oil consistent with heating demand for natural gas creating gas- specific pricing. Using the model to infer relative values when evidence favors integrated markets and proportional price movements, we find that the industry 10-1 rule-of-thumb holds, meaning that the value of one barrel of oil is 10 times the value of one MMbtu of natural gas. When natural gas decouples, the relationship is 8-1, although in these states natural gas should not be valued relative to oil as there is no meaningful economic relationship between the markets.
Keywords: Oil, natural gas, peak load pricing, regime switching, price dynamics
We give some basic empirical characteristics of the Oslo Stock Exchange in the period after 1980. We give statistics for number of firms, the occurences of IPO's, dividend payments, trading volume, and concentration. Returns for various market indices and portfolios are calculated and described. We also show the well known calendar anomalies, the link between number of stocks in a portfolio and its variance and industry characteristics of the OSE.
An important idea behind the Norwegian oil fund mechanism and the fiscal spending rule is to protect the non-oil economy from the adverse effects of excessive spending of resource revenues over the Government budget. A critical assumption in this respect is that public sector saving is not being offset by private sector dis-saving, which is at stake with the hypothesis of Ricardian equivalence. Based on a framework of co-integrating saving rates, this model provides an empirical test of the Ricardian equivalence hypothesis on Norwegian time series data. Although the model rejects the strong-form presence of Ricardian equivalence, results indicate that the Norwegian approach does not fully succeed in separating spending of resource revenues from the accrual of the same revenues.
Key words: Resource wealth, saving, fiscal policy
JEL classification: D91, E21, E61, Q33
We study risk-taking behavior in tournaments where the optimal strategy is to take no risk. By keeping the optimal strategy constant, while varying the competitiveness in the tournaments, we are able to investigate the relationship between competitiveness and excessive risk-taking. In the most competitive tournament, less than 10% of the subjects played the optimal strategy in the first rounds. The majority playing dominated strategies increased their risk-taking during game of play. When we removed feedback about winner’s decisions each round, and when we reduced the number of contestants in the tournaments, subjects significantly reduced their risk-taking. We also find strong peer group effects. In particular, the winner’s decision in round t-1 had a strong and significant effect on the competitor’s risk-taking in round t.
Keywords: Experiment, risk-taking, tournaments, peer effects
JEL Codes: C91, D80, M52
Global financial crises have revealed the systemic risk posed by economic contagion as the increasing interconnectedness of the global economy has allowed adverse events to spread across countries more easily. These adverse economic events can be attributed to contagion through either credit or trade channels, or to common macroeconomic conditions that cause adverse events in multiple countries even without contagion. We model this system as a game between five types of players: countries; central banks; banks; firms; and households. In this framework, we model strategic choices, conduct sensitivity analysis, and analyze the impacts of random shocks in two examples. Our results demonstrate that each of the three causes discussed above (contagion through credit channels, contagion through trade channels, or common macroeconomic conditions with no contagion) can lead to crises even if all agents in the model behave rationally
Keywords: Contagion, financial risk, game theory, bank, central bank, country, firms, households, consumption, production, capital, default, borrow, lend, financial friction, shock, sensitivity analysis
Global financial crises have revealed the systemic risk posed by economic contagion. We provide perspectives on the formulation of a game between countries, central banks, banks, firms, households, and financial intergovernmental organizations to model the dynamics between players. We model strategic choices, strategy sets, and utility functions to provide new tools to handle financial crises. The model is illustrated with examples using sensitivity analysis. One country, and two countries, are considered, and we simulate the impacts of random shocks under a variety of assumptions.
Keywords: Contagion, financial risk, game theory, bank, central bank, country, firms, households, intergovernmental organization, consumption, production, capital, default, borrow, lend, financial friction, shock, sensitivity analysis evi
We present an experimental study on how people take risk with other people’s money. We use three different elicitation methods, and study how each subject makes decisions both on behalf of own money and on behalf of another individual’s money. We find that a majority of subjects make different decisions on behalf of others than on behalf of themselves. Approximately one third of the subjects increase risk-taking when it is on behalf of another subject, while one third reduces risk-taking. In sum, we find a weak tendency of lower risk-taking with other’s money compared with own money. We also find that subjects on average think that others are more risk averse than themselves. Moreover, subjects believe that other participants take less risk with their own money than with other people’s money.
Keywords: Risk-taking, Experiment, Social preferences
JEL Codes: C91; G11
Governments in extraction countries are anxious to estimate expected investment in development projects, since they represent an essential element of the macro economy. The overall level of activity is also crucial to oil companies, since the macro picture affects cost levels, the supplies market and recruitment opportunities. The paper outlines factors that explain fluctuations in investment in petroleum projects on the Norwegian continental shelf.
Keywords: Investments; oil industry; cost overruns; megaprojects; business cycles
JEL Codes: M21; L71; F21; E32
This paper studies financial statement information from the 50 largest international oil and gas companies during 1992 to 2011 and evaluates their relation to market values. In particular, we examine how this relationship is affected by accounting method choice (successful efforts versus full cost accounting) and vertical integration. We find that net income is more value relevant for full cost companies compared to companies that use the successful efforts accounting method. Furthermore, the value relevance of oil and gas reserves is different among successful efforts and full cost companies. Larger reserves among successful efforts companies are awarded a premium by stock markets. The value relevance of book value is significantly lower for integrated companies than for pure upstream companies. We also find that the value relevance of oil and gas reserves is different for upstream and integrated companies.
Keywords: Company Valuation, Value-relevance, Financial Analysis, Oil and Gas Industry
JEL Codes: F23; G00; L71; M41
Petroleum administration can be regarded as a principal-agent problem. The government allocates exploration and production rights to petroleum companies on behalf of the population. The government is the principal and the companies are agents. With the aim of capturing revenue for the state, the government devises a petroleum tax system which takes account of the investment decisions made by the companies, while acknowledging for the fact that the companies may report strategically to the government. An important issue is how tax deductions are to be treated in investment analysis. A discrepancy arises here between assumptions made in some areas of tax theory and the actual investment analyses conducted by the companies. Tax theory has given rise to discussion and controversial tax proposals for the petroleum sector in Norway, Denmark and Australia. It led, for example, to reductions in tax-related depreciation for the Norwegian petroleum industry in May 2013. The article reviews this tax debate and analyses the implications of basing tax design on counter-factual investment behaviour.
Keywords: petroleum taxation; tax design; valuation; corporate behaviour
JEL codes: L71; F21; G02; H21; H25; H32; M21
We present a framework for modelling optimum capital adequacy in a dynamic banking context. We combine the (static) capital adequacy framework of Repullo (2013) with a dynamic banking model similar to that of Corbae and D`Erasmo (2014), with the extra feature that the probability of systemic risk is endogenous. Unlike previous work, we examine frameworks to ameliorate bankruptcy using both capital adequacy and liquidity requirements. Since equity is costly, the social cost of regulation may be reduced if a regulatory capital requirement can be accompanied by other tools such as a liquidity buffer.
Keywords: Bankruptcy; Capital Adequacy; Endogenous Systemic Risk; Liquidity Requirement; Regulation Costs
JEL: E500, G210, G280
Where do central bank priors come from and how do policymakers evaluate a model before empirical probabilities are available? To address these questions, we analyze two central banks that choose priors about a rare disaster with the help of expert policy teams. Policymakers are misspecification averse when assessing subjective evidence, and therefore hedge in their selection of priors. This hedging results in priors that accommodate a modicum of belief disagreement.
Keywords: Belief Disagreement; Central Bank; Misspecification Aversion; Rare Disaster; Subjective Evidence
Decision theory has relatively little to say about the formal choice of priors. We pursue the issue of prior choice in a framework that builds on consumer theory. We analyze discovery decisions of a reasoner, in an environment of hypotheses with heterogeneous, subjective plausibility. We illustrate implications for equilibrium selection when hypotheses that differ in terms of optimism are selected from a distribution with latent probabilities.
Keywords: Belief Disagreement; Discovery Decision; Latent Probability; Subjective Evidence
Where do prior beliefs come from and how do decisionmakers ascribe confidence in a theory before probabilities are available? To address these questions, we outline an axiomatic approach for selection of priors, where the reasoner is misspecification averse, and exhibits rare event sophistication. A crucial role is played by the dependence between candidate priors. Less dependent priors allow the reasoner to hedge misspecification bias relative to any given benchmark prior. The framework accommodates belief disagreement, since reasoners with relatively less tolerance for dependence select more diverse priors.
Keywords: Belief Disagreement; Dependence; Misspecification Aversion; Rare Event Sophistication
Extreme events affect both the real economy and financial markets, and it is valuable to understand their interrelationship. We analyze the likelihood of crises in the macroeconomy and in financial markets. We compare rare disaster data from Barro and Jin (2011), crisis data from Reinhart and Rogoff (2009), real time macroeconomic data from Diebold et al (2009), and a unique industry dataset of Turbulence Indices. We examine dependence across the various measures of crises, as well as predictability, using annual and daily data. For annual data, the dependence between crises in the real and financial sectors increases over time for emerging markets, but decreases for OECD countries. We also document persistence at the one year and two year horizons for disasters in the real economy. For daily data, there is, surprisingly, little relation between turbulence in US equity and the real economy. However, there is strong evidence of two-way predictability up to two weeks out for the US economy and global turbulence. A dynamic copula model indicates that the real economy and various turbulence indices alternate between regimes of positive and negative dependence.
Keywords: Crisis; Dependence Regimes; Extreme Event; Predictability; Rare Disaster; Turbulence
We analyze whether executive compensation reflects firm default risk, measured by distance to default of Merton (1974). Using a large panel of firms, we explore several empirical frameworks. In least squares, fixed effects and quantile regression settings, default risk and volatility possess significant explanatory power for compensation. The signs of the estimated coefficients are consistent with higher compensation for higher risk-bearing--managers of firms with higher default risk are paid more. In the benchmark models, estimates for default risk are quite small, indicating effects on average compensation of around $9,000. The corresponding figure for the upper 5-percentile of CEOs is $50,000. Volatility has much larger average effects, in excess of $25 million, with upper 5-percent effects above $150 million. In a partial identification framework, compensation is systematically associated with default risk. Moving to a higher default risk firm raises compensation by at least $.96%, corresponding to around $70,000 for average CEOs, and above $400,000 for the top 5-percentile. The largest effect applies for moving into the highest default risk firms. For such firms, the treatment effect exceeds $180,000 for average CEOs, and for the top 5-percent, the effect is well above $1 million. Conditional means exhibit monotonicity, suggesting that compensation is amenable to a treatment response approach. Surprisingly, when we utilize an instrumental variables approach, an increase in default risk reduces total compensation. Thus our results uncover a complex but powerful link between firm risk and CEO compensation, which may make it difficult to regulate compensation by means such as `Say-on-Pay'.
Keywords: Default; Executive Compensation; Treatment Response; Partial Identification; Volatility
We study the problem of potentially spurious attribution of dependence in moderate to large samples, where both the number of variables and length of variable observations are growing. We approach this question of double asymptotics from both theoretical and empirical perspectives. For theoretical characterization, we consider a combination of poissonization and large deviation techniques. For empirics, we simulate a large dataset of i.i.d. variables and estimate dependence as both sample size and the number of iterations grow. We represent the different effects of sample size versus length of variables, via an empirical dependence surface. Finally, we apply the empirical method to a panel of financial data, comprising daily stock returns for 60 companies. For both simulated and financial data, increasing sample size reduces dependence estimates after a certain point. However, increasing the number of variables does not appear to attenuate the potential for spurious dependence, as measured by maximal Kendall's tau.
Keywords: Double Asymptotics; Empirical Dependence Surface; Financial Data; Poissonization; Simulation; Spurious Dependence
In standard trust games, no trust is the default, and trust generates a potential gain. We investigate a reframed trust game in which full trust is default and where no trust generates a loss. We find significantly lower levels of trust and trustworthiness in loss domain when full trust is default than in gain domain when no trust is default. As a consequence, trust is on average profitable in gain domain, but not in loss domain. We also find that subjects respond more positively to higher trust in loss domain than in gain domain.
Etter 10 år med kraftig vekst tyder mykje på at aktiviteten i petroleumsnæringa no er i ferd med å flate ut. Det oljeprisdrivne oppsvinget i investeringane på norsk kontinentalsokkel har gitt viktige vekstimpulsar til fastlandsøkonomien, og var ei av hovudårsakene til at norsk økonomi ikkje opplevde det same tilbakeslaget som resten av Europa i etterkant av Finanskrisa 2008. Med bakgrunn i kraftig kostnadsauke legg aksjemarknaden no press på oljeselskapa for å kutte kostnadar, skjerpe kapitaldisiplinen og sikre utbyttekapasiteten. Mykje tyder derfor på at oljeinvesteringane i Noreg no passerer toppen, og at ringverknader til leverandørnæringa og fastlandsøkonomien vil avta dei neste åra.
Previous research clearly suggests that the explanation of excess asset returns is not fully captured by excess return on the market portfolio and the CAPM beta, as implied by Fama-French (1993) three-factor model. Among the large number of studies following in the footsteps of Fama and French, very few studies include industry-specific variables to explain excess asset returns. Using monthly financial data for 117 oil and gas companies from 1992 to 2006, we supplement the Fama French approach with an industry-specific fundamental factor to capture company exposure to oil and gas exploration risk. Our results indicate that exploration risk contributes significantly to the explanation of oil company excess returns over the period.
We use the introduction of a cost on high message to trade ratios for traders at the Oslo Stock Exchange to investigate the effects on market quality and fragmentation of introduction of such ``speed bumps'' to equity trading. The exchange introduced a fee payable by market participants whose orders (messages to the exchange's trade system) exceeded seventy times the number of consummated trades. Market participants quickly adjusted their behavior to avoid paying the extra cost. The overall ratios of messages to trades fell, but common measures of the quality of trading, such as liquidity, transaction costs, and realized volatility, did not deteriorate, they were essentially unchanged. This is a policy intervention where we can match the treated sample (OSE listed stocks) with the same assets traded elsewhere. We can therefore do a ``diff in diff'' analysis of liquidity in Oslo compared with liquidity of the same asset traded on other exchanges. Surprisingly, we see that liquidity, as measured by the spread, deteriorated on alternative market places when the tax was introduced, a tax that is only valid for trading at the OSE. The spread is the only liquidity measure for which we observe this difference between the OSE and other markets, for depth and turnover we do not find any differences between other markets and the OSE.
Updated Jan 2017.
In repeated games, it is hard to distinguish true prosocial behavior from strategic instrumental behavior. In particular, a player does not know whether a reciprocal action is intrinsically or instrumentally motivated. In this paper, we experimentally investigate the relationship between intrinsic and instrumental reciprocity by running a two-period repeated trust game. In the `strategic treatment' the subjects know that they will meet twice, while in the `non-strategic treatment' they do not know and hence the second period comes as a surprise. We find that subjects anticipate instrumental reciprocity, and that intrinsic reciprocity is rewarded. In fact, the total level of cooperation, in which trust is reciprocated, is higher in the non-strategic treatment. Instrumental reciprocity thus seems to crowd out intrinsic reciprocity: If one takes the repeated game incentives out of the repeated game, one sees more cooperation.
We give some basic empirical characteristics of the Oslo Stock Exchange in the period after 1980. We give statistics for number of firms, the occurences of IPO's, dividend payments, trading volume, and concentration. Returns for various market indices and portfolios are calculated and described. We also show the well known calendar anomalies, the link between number of stocks in a portfolio and its variance and industry characteristics of the OSE.
The labor market conditions that youth face at the typical age of labor market entry can impact their success in the labor market. Utilizing registry data for all Norwegian males born in 1961–1975, I demonstrate that local unemployment rates at the typical age of graduation from compulsory school (age 16) and high-school (age 19) have persistent, negative effects on males’ earnings, employment, and disability pension utilization when measured as late as age 35. With data on every male IQ, I am able to study how labor market conditions at age of graduation have varying effects for low- and high-ability males. As expected, low-ability males are particularly vulnerable to business cycles at the time of labor market entry. For low-ability youth, a 1 percentage point increase in the local unemployment rate at age 16 reduces earnings at age 35 by about 4 percent and increases the likelihood of being on disability pension by about 20 percent.
We develop a game theoretic model for the central bank’s profit and the market’s profit dependent on quantitative easing (QE) or no quantitative easing (no QE), where the market responds by lowering interest rates, keeping interest rates unchanged, or raising interest rates. The model is compared with empirical data. We classify 69 QE events and 69 no QE counterfactuals for four central banks, i.e. 17 events for the Federal Reserve, 9 events for Bank of England, 32 events for Bank of Japan, and 11 events for the European Central Bank. The market response to the BoJ and ECB QE is almost exclusively to keep interest rates unchanged. Although this response is most common to the Federal Reserve QE (9 events), the market frequently responds as the Federal Reserve prefers, by lowering interest rates (7 events). For BoE the market response is evenly split across the three outcomes.
During the last decade, Value-at-Risk (VaR) has become the most common tool to measure the exposure to short term financial risk for companies in the oil industry, in common with most other sectors. However, VaR has been criticized after the financial crisis for providing too optimistic risk estimates and allowing portfolio managers with inflated credit lines. The crisis hit companies extracting natural resources hard, and the oil and gas industry experienced a severe fall in prices, with Brent oil dropping from 40 to below 0 in just 6 months. During events like the financial crisis, companies need to rely on precise risk estimates to adjust their positions. We show that when asset prices are highly correlated, a typical feature in the oil and gas industry, companies are vulnerable to inaccurate estimates. The findings are also compared to a theoretical study using Monte Carlo.
The economics of crime and punishment postulates that higher punishment leads to lower crime levels, or less severe crime. It is how- ever hard to get empirical support for this rather intuitive relationship. This paper offers a model that can contribute to explain why this is the case. We show that if criminals can spend resources to reduce the probability of being detected, then a higher general punishment level can increase the crime level. In the context of antitrust enforcement, the model shows that competition authorities who attempt to fight cartels by means of tougher sanctions for all offenders may actually lead cartels to increase their overcharge when leniency programs are in place.
We experimentally investigate to what extent people trust and honor trust when they are playing with other people's money. We adopt the well-known trust game by Berg, Dickhaut and McCabe (1995), with the important difference that the trustor (sender) who sends money to the trustee (receiver) does this on behalf of a third party. We find that senders who make decisions on behalf of others do not behave significantly different from senders in our baseline trust game who manage their own money. But we find a gender specific treatment effect among the receivers. Women return significantly less money when senders send a third party’s money than when senders send their own money, while there are no such treatment effects among men. Moreover, women return significantly less than men when the sender is managing a third party’s money.
We analyze optimal incentive contracts in a model where the probability of court enforcement is determined by the costs spent on contracting. The analysis shows that contract costs matter for incentive provision, both in static spot contracts and repeated game relational contracts. We show that there is not a monotonic relationship between contracting costs and incentive intensity, and that an increase in contracting costs may lead to higher-powered incentives. Moreover, we formulate hypotheses about the relationship between legal systems and incentive provision. Specifically, the model predicts higher-powered incentives in common law than in civil law systems.
We present a model in which a motivator can take costly actions - or what we call motivational effort - in order to reduce the effort costs of a worker, and analyze the optimal combination of motivational effort and monetary incentives. We distinguish two cases. First, the firm owner chooses the intensity of motivation and bears the motivational costs. Second, another agent of the firm chooses the motivational actions and incurs the associated costs. In the latter case, the firm must not only incentivize the worker to work hard, but also the motivator to motivate the worker. We characterize and discuss the conditions under which monetary incentives and motivational effort are substitutes or complements, and show that motivational effort may exceed the efficient level.
There is a common notion that incentive schemes in the financial industry trigger myopia and risk-taking. In some sense this contrasts with the concept of myopic loss aversion (MLA), which implies that myopia mitigates risk-taking. A number of experimental studies support the MLA-hypothesis by showing that people take less risk the more frequently their investments are evaluated. In this paper we show experimentally that if subjects are exposed to tournament incentives, they take more risk the more frequently investments are evaluated.
The main purpose of this project is to examine the liquidity and activity in the secondary market for Norwegian debt securities. The second objective is to determine whether the activity and data availability is sufficient to construct indicators that can be used to monitor the state of Norwegian bond market on a regular basis. To this end we examine a detailed data set provided to us by Oslo B{\o}rs Informasjon (OBI) containing the complete record of daily trading activity in all exchange listed fixed income securities in Norway over the period 1999-2011. Due to the low trading activity in corporate securities and the fact that a large part of trading in corporate debt is conducted off market (OTC), makes it challenging to produce reliable liquidity indicators. In particular, order based liquidity measures (such as the bid ask spread), that typically are superior measures of liquidity supply, are in most cases not possible to construct due to the lack of two sided quote observation. On the other hand, due to the reporting rules of all OTC trades to the Oslo Stock Exchange, trade based measures of liquidity (such as the Amihud ILR) are more informative.