Cal B. Muckley

Is Information Assimilated at Announcements in the European Carbon Market

We examine the high frequency new information impact on prices, volatility, trading volume and illiquidity at scheduled macroeconomic and verified emissions announcements for the European carbon futures market. Verified emissions, United States non-farm payroll and German new factory order macroeconomic announcements impact carbon prices swiftly, within 5min. We show that a one standard deviation surprise increase in verified emission announcements is associated with an approximate ten percentage point (9.96%) increase in carbon futures returns. A wait-and-see stylized trading behavior is evident at announcements in volatility and trading volumes. Market illiquidity increases at announcements in relation to United States non-farm payroll, albeit there is no evidence of an increase in illiquidity prior to announcements. The development of new information impact, over time, occurs mainly in the at-announcement 5-minute time interval.

Prospective Costs for the Aviation Sector of the Emissions Trading Scheme

This chapter analyses the cost impact to the aviation sector of the European Union Emissions Trading Scheme (EU ETS) being extended to include the sector. To motivate our cost impact simulation work, we initially study ultra-high frequency data utilising the December 2012 European Union Allowance (EUA) futures contract. We find evidence indicative of EU ETS market efficiency. Hence, we inform our simulation specification using information set related to fundamental price determinants. We find a minimal cost impact of an EU ETS extension to the industry sector of almost 9 billion Euros for the period 2012–2020. Such a material cost accrues from a nominal price of 10 Euro per tonne of CO2 emissions. This chapter contributes to emerging research on the cost impact of the EU ETS to the aviation sector.

The Price Forming Process in Energy Markets

In this chapter we examine the price formation process in European energy markets during the period 2005–2009. In order to assess the development of these markets, we identify potential theoretical relations related in the price formation process, using a set of factors including energy prices and European Union allowance prices as well as controlling for important influences such as economic growth. In terms of our methodology, we adopt both static and recursive versions of the Johansen (J Econ Dyn Control 12:231–254, 1988) multivariate cointegration likelihood ratio test, as well as a variation on this test in order to control for time varying volatility effects, to estimate these potential theoretical relations. The findings are indicative of a new pricing regime emerging since January 2008 which empirically interlinks the coal, gas and oil markets with European Union allowance futures contracts. It would appear that European Union allowance contract prices play an integral role in the price formation process in European energy markets.

Terrorism, Tourism and FDI: Estimating a Lower Bound on the Peace Dividend in Northern Ireland

In this article we estimate the economic cost of terrorism with regard to foreign direct investment and tourism in Northern Ireland during periods extending from 1970 through to 2007. Previous studies which have estimated the economic cost of terrorism internationally have neglected Northern Ireland. As a result, we focus exclusively on the economic cost of terrorism in Northern Ireland, which has been significant. In particular, our analyses indicate that for those initiatives reliant on foreign direct investment as well as for the tourism sector, a fatality as a result of terrorism imputes a minimum economic cost of £3.69 million pounds sterling. Taken together, our findings indicate an economic lower bound on the cost of terrorism in Northern Ireland.

The Role of the Japanese Yen in Asian Exchange Rate Determination

We study up to 27 years of weekly data on nine currencies to examine the importance of the Japanese yen in exchange rate determination in North and Southeast Asia. We combine a time-varying methodology alongside a focus on long-run equilibrium. Our findings suggest that the Japanese yen had virtually no influence on Asian exchange rates in the 10-year period prior to the Asian financial crisis in the late 1990s. Since the crisis, the yen and the German mark in particular have exerted a significant influence over the regions exchange rates except for the Chinese yuan, the Hong Kong dollar and the Malaysian ringgit, which continue to be closely related to the US dollar.

Energy Derivatives Market Dynamics

This chapter examines the EU Emissions Trading Scheme options and futures markets dynamics during the period 2005–2011. Observations on returns, volatilities and volumes on derivative instruments are studied. In addition, spot/future correlations, term structures and option implied volatility smiles and surfaces are examined. The aim is to ascertain whether the behavior of the EU ETS derivatives markets can be compared to that of commodity markets, specifically the developed West Texas Intermediate (WTI) crude oil derivatives market. The results indicate that the EU Emissions Trading Scheme derivatives markets have matured markedly since the start of Phase 2 of the Scheme, with rising volumes and declining return volatilities. Spot/future correlations, term structures and option volatility smiles and surfaces exhibit comparable behavior over time, albeit with certain discrepancies, with that found in the developed WTI crude oil derivatives market. These results are valuable both for traders of EU allowances and for those policy makers seeking to improve the design of the EU Emissions Trading Scheme.

Global Stock Market Interdependencies and long-term Portfolio Diversification

In this paper, we examine the scope for international stock portfolio diversification, from the viewpoint of a United States representative investor, in regard to both the Asian and the European stock markets. Our findings indicate that despite correlation style evidence to the contrary, the European stock markets provide a superior long-term diversification opportunity relative to that provided by the Asian stock markets. Hence, a short-term measurement of interdependence appears to be uninformative with respect to the diversification opportunities of investors with long-term investment horizons. In terms of methodology, we adopt common stochastic trend tests, including a common stochastic trend test which accounts for generalised autoregressive conditional heteroskedasticity effects in conjunction with the recursive estimation of these tests to estimate the development of long-term stock market interdependence linkages. Recursively estimated robust correlations between the international stock markets are utilised to reveal the nature of short-term stock market interdependence linkages.

Getting It Right or Getting It Cursed: Auction Prices in a Residential Real Estate Bubble

This is the first study to test for a winner’s curse in a bubble market. Our hand-collected sample comprises the entire sequence of bids and the experience of the winning bidder at Irish residential real estate auctions, prior to the collapse of the bubble. Portfolios of practitioner-selected self-similar properties and a hedonic pricing model facilitate benchmark property price estimation. We show neither real estate investors nor owner occupiers shade auction bids to avoid the winner’s curse. Winning real estate investors, however, pay more for properties. Thus, real estate investors ride the wave of a property bubble and potentially exacerbate it.

Does Stock Market Illiquidity Influence the Cost of Borrowing? Evidence from Syndicated Loans

We show that firms with illiquid stock pay higher syndicated loan spreads. This result is invariant to multiple measurements of stock illiquidity, and is robust to a wide set of cross-sectional loan and firm features, firm and year fixed effects. This result also holds using matched difference-in-differences at an exogenous reduction in the minimum tick size of major United States exchanges and using a two-stage least squares estimator. Stock illiquidity is, moreover, shown to diminish the benefit to the loan recipient of a lending relationship. A rationale for these findings is that stock market illiquidity impairs the bargaining power of corporate borrowers, in the loan spread negotiating procedure, as it raises the cost of alternatively issuing equity. Our findings, thus, indicate that relative bargaining power plays a systematic role in determining syndicated loan spreads.

Why Do Privatized Firms Pay Higher Dividends

Newly privatized firms increase dividends after divestment, and also pay significantly higher dividends compared to always-private firms. We examine a sample of 83,468 firm-years (358 privatized and 4,894 always-private firms) across 26 countries and show that the dividend premium is significantly positively related to new agency costs induced by privatization and is associated with levels of increased operating efficiency and higher earnings. The premium manifests in both civil and common law countries, but is significantly higher in civil law countries. Our findings hold invariant to home-country economic development or to the cross-country and temporal variation in the dividend tax penalty.We find that the major determinants of the payout premium of firms after privatization are improved firm operating performance and a prevalence of agency costs which are mitigated by higher pay outs. We examine up to 82,612 firm-years (up to 409 privatized and 6,193 non-privatized firms) across 26 countries. The privatized firm payout premium increases substantively in civil law countries and is inversely related to the proportion of closely held shares. It also increases with firm earnings, efficiency and growth opportunities. Our main findings do not materially differ in respect to the international variation over time of the dividend tax penalty and across the state of economic development in the country of firm privatization but they are not evident in industry sectors with high levels of regulation. We therefore provide an economic rationale for the higher pay outs of privatized firms.