Mehra and Prescott's (1985) equity premium puzzle has stirred continued debate on just why the average return on equity has been so high relative to the risk-free rate. Recent work by Backus, Gregory, and Zin (1989), Knez and Snow (1992), and Trainor (1992) have also documented a liquidity premium puzzle. In addition, Fama and French (1992) have found that beta has no explanatory power in explaining an asset's excess return. These studies point out that current financial models are unable to explain even the most basic premise that assets with greater risk have higher returns. The question that now arises is why are these financial models failing to explain excess returns? One obvious answer to this question which has been completely ignored is that the proxy being used to define risk is wrong. It is the contention of this proposal that investors are concerned about buying into an asset and subsequently experiencing a sequence of below average or negative returns. Under this premise, using the variance of returns as a measure of risk is inadequate and a new risk measure must be derived. This study demonstrates that measuring the deviation of an investor's wealth level from buying a risky asset in relation to what an investor's wealth level would have been from buying a risk-free asset discerns both the deviation of returns and the propensity of returns to sequence. It is then shown that sequencing risk and the slope of the term structure are integrally related. Specifically, the steeper the yield curve, the greater sequencing risk will be priced since a negative sequence could result in forced borrowing by investors when rates are high to maintain a constant consumption rate. Empirically, it is shown that measuring an asset's risk by the contribution it makes to a portfolio's propensity to sequence rather than to a portfolio's variance more accurately explains portfolio returns within a CAPM type framework. Additionally, size does not usurp the explanatory power of this new beta. Surprisingly, it is found that the explanatory power of the traditional beta and size are contingent upon the slope of the term structure being fairly flat. The wealth beta seems to be unaffected. The conclusion of the study suggests that current financial models are seriously flawed due to the erroneous definition and mis-measurement of risk. / Ph. D.

A small open economy model which incorporated. the rational expectations - natural rate hypothesis was constructed. The resulting model indicated that to the extent that foreign monetary policies may affect the relative price of domestic to foreign goods, the domestic unemployment rate was not neutral with respect to foreign monetary policies. Using Canada as the small open economy and the United States as the rest of the world, the weak open economy version of the natural rate hypothesis was empirically tested for both the flexible and the fixed exchange rate periods. The empirical methodology employed was the Granger causality test. The results based on the goodness of fit test indicated that for all the exchange rate regimes, the Canadian unemployment rate was rtot Granger caused by any causal variables considered. However, the results based on a comparison of the postsample forecasting performance were different. For the first flexible exchange rate. period, 1953-1962, we found that the Canadian unemployment rate was Granger caused by the foreign price level. However, this result was consistent with the weak open economy version of the natural rate hypothesis. We also found that the foreign unemployment rate Granger caused theCanadianunemployment rate in the second flexible rate period, 1970-1979. But, this did not damage the natural rate hypothesis since the natural rate hypothesis does not preclude real variables from having a systematic effect on the Canadian unemployment rate. The tests for rationality with the Canadian price level equations for both the flexible and the fixed exchange rate periods were inconclusive. First, we were not able to detect a breakpoint in the foreign and domestic money rules. The alternate tests of rationality which examined whether the relevant variables were included in the Canadian price level equations were also inconclusive because of a high degree of multicollinearity between the variables. / Ph. D.

This study investigates the effects of futures trading on petroleum price variability. Though a number of critics from various quarters claim futures markets have made petroleum prices more volatile, economic reasoning does not support this viewpoint. A review of theoretical studies and empirical investigations of other commodities shows general support for the hypothesis that futures markets do not destabilize prices and may, in fact, add to price stability. In this study, regression analysis is used to explain the price variability of heating oil and gasoline in terms of factors that may affect this variability, including the existence of futures markets. Though the empirical tests performed are biased towards finding destabilizing effects of futures markets, no statistically significant increase in price volatility is found, and in the case of gasoline, indications of stabilizing effects are found. Thus, neither the results of other studies of futures markets nor examination of petroleum futures trading support the critics' contention that futures trading has destabilized petroleum prices. / M.A.

A key issue in this paper is whether or not stock prices may be predicted based on information obtained by predicting money supply growth. Based on the evidence presented in this paper the conclusion is no. First, there is a strong contemporaneous correlation between money growth and stock price changes. There is little correlation with lagged money growth. Information regarding historical data on the money supply would not provide a means of forecasting stock prices. This information is already discounted in the price of the stock. Second, the evidence on expected and unexpected money growth shows a lack of significance in the expected variable coefficients. This is consistent with the rational expectations (efficient markets) theory that only unexpected changes will have an effect on stock prices. Further evidence is that generally only contemporaneous unexpected money growth is strongly significant. One way of analyzing an efficient markets-oriented model of money's affect on stock prices is a two-step approach which was used in this analysis. The first step was to develop a model to forecast money growth. The predicted values and residuals from the forecasting model were then used as proxies for expected and unexpected variables, respectively. In the second step, these variables then served as regressors to predict changes in the stock market price in a second equation. / Master of Arts

Consumer awareness of prices was investigated through the use of recognition and recall tests. The objective of this research was to determine more precisely whether buyers are aware of prices they pay for grocery items. Using theories of information processing and memory led to the thesis that a recognition memory test would be more appropriate for measuring price awareness. The research method used was a combination questionnaire/ interview. Shoppers were followed and the prices of three products picked up for purchase were recorded. The subject was then approached and given either a recall or recognition test to determine whether they were aware of the prices for the products. The responses to the tests were timed and several questions concerning confidence in the answers given and frequency of product purchase were also asked. The conclusions from this research tend to support the use of recognition as an appropriate measure for tapping memory and determining consumer price awareness. That is, more buyers could correctly recognize prices than could recall prices. / M.S.

This study was designed to compare the price levels of the Northern and Southern marketing areas and to determine if the returns to Virginia vegetable growers would be increased if more shipments were made to the Southern area. Six crops, snap beans, cabbage, sweet corn, cucumbers, peppers, and tomatoes, were studied during 1954, 1955, and 1956. Eighteen consecutive weeks beginning near the first of June were studied during each year. Price and quantity data were collected from the daily market reports of New York, Baltimore, and Atlanta. Additional data on shipments of the six crops from Virginia were collected from Eastern Virginia vegetable producers. The prices which Virginia vegetable growers received for their produce in the terminal markets were found to be within a 25 percent range of the weekly terminal market median prices for 74 percent of the shipments where comparisons could be made. The price level in the Southern market was significantly higher than in the Northern market for snap beans, cucumbers, peppers, and tomatoes. There was no difference between the Northern and Southern market price levels for cabbage and sweet corn at the desired confidence level, but the Southern market price level was found to be higher at the 20 percent confidence level. The analysis of the two Northern markets indicates that no significant difference existed in the price levels of these markets for any of the crops. This relationship could not be accepted at the desired confidence level for cabbage, peppers, and tomatoes because the price variances were not homogeneous. After deducting transportation costs from Virginia to the respective markets, the highest net price to Virginia vegetable growers for most crops was available more often from the Southern market than in the Northern market. The study of these net prices in conjunction with the shipments by Virginia growers during the same period indicated that even though higher returns could have been realized from shipments to the Southern marketing area, Virginia growers generally did not take advantage of them. Some significant relationships between price and quantity arriving on the market were found. However, a few of the relationships did not conform to the traditional inverse relationships of the factors as expressed economic theory. Such results indicate that the data may not have been suitable for this type analysis. Complete data on the price of each unit and the total number of units in the markets should give a more reliable supply and demand relationship. Although the weekly period proved satisfactory for determining the differences in price levels of the markets, the use of such a period imposes serious limitations on the analysis of price and quantity relationships. If marketing decisions generally are made on the basis of the relative prices of the previous day or two days on the markets, the weekly period may average out many of the pertinent differences. Even though the demand in the Southern market was usually more elastic than in the Northern market, the price in the Southern market was found to generally be more responsive to a given change in quantity arriving on the market. This responsiveness of price to varying quantities arriving on the market was primarily a function of the difference in the size of the markets. The elasticity of demand of the markets was found to be of secondary importance in determining the responsiveness of price. The greatest difference in price responsiveness between the markets was for peppers. They were much more responsive to changes in the quantity arriving in the Southern market than in the Northern market. The prices of snap beans, cucumbers, and tomatoes are also more responsive to quantity changes in the Southern market. The price of sweet corn was found to be more responsive to additional carlot arrivals in the Northern market. Cabbage was not used in the calculations because the preliminary results did not conform to economic theory. / Master of Science

Yes / This paper develops a model of optimal choice over an array of different assets, including domestic and foreign bonds, domestic and foreign equities and domestic and foreign real money balances in order to examine the determination of the real exchange rate in the long-run. The model is tested empirically using data from the UK and the USA. The results show that all the coefficients of the model are right signed and significant and consequently financial assets may play a significant role in the determination of the real exchange rate.

Yes / This is a pioneering effort to test the comparative performance of two competing models for out-of-sample forecasting the term structure of volatility of crude oil price changes employing both symmetric and asymmetric evaluation criteria. Under symmetric error statistics, our empirical model using the estimated growth factor of volatility through time is overall superior, and it beats in most cases the benchmark model of the square-root-of-time for holding periods between one and 250 days. Under asymmetric error statistics, if over-prediction (under-prediction) of volatility is undesirable, the empirical (benchmark) model is consistently superior. Relative performance of the empirical model is much higher for holding periods up to fifty days.

Dairy farming in Virginia could be more profitable if price and yield risks affecting the cost and availability of feed inputs such as corngrain, corn silage, alfalfa and ryelage are reduced. Price and yield risk facing dairy farmers in Virginia can be reduced through a marketing strategy like hedging and government commodity program participation. The overall objective of this study is to evaluate how the variability of price and yields of particular feed crops affect the variability of expected returns in dairy farming. Specific objectives include: 1) to evaluate the relationship between feed production risk and the level and variability of net returns for a representative dairy farm in Virginia; 2) to evaluate the relationship between price risks of purchased feed inputs and the variability of net returns; 3) to draw implications from the results that can be used to help dairy farmers better manage feed production risk. To accomplish these objectives, the target MOTAD risk analysis technique is used. The empirical model is developed in four steps. First, the model activities such as milking and feeding of cows, heifer and calf activities, crop production, harvesting, labor, and buying and selling activities were created. Second, variable yields based on probability elicitation from dairy farmers were generated. Third, variable prices based on commodity options were generated; and fourth a target income constraint was derived. Results from the analysis indicated that the target income constraint was exceeded in every state of nature for the representative farm resulting in an efficiency frontier of a single point. Increasing the assumed debt-asset ratio and annual debt service requirement, resulted in a risk-return tradeoff with lower levels of risk (measured as mean deviation below target or MDBT) being obtained at the expense of lower levels of expected returns. At a higher debt asset-ratio, when the mean deviation below target (MDBT) was varied over a range of values, the quantity of crops harvested also varied. The average harvested acres of alfalfa and corn silage increased as the MDBT increased while the harvested acres of corn grain and ryelage decreased. Alfalfa harvest is increased because less forage in terms of ryelage is harvested and the average quantity of corn grain decreases as the MDBT increases because more com silage is grown in place of the costlier but less risky ryelage. The results show that hedging and participation in the government feed grain program could lead to effective risk reduction and increases in expected returns for the dairy farmer. Government program participation increased expected returns at all debt-asset ratios. Both government programs and hedging reduced risks at higher debt-asset ratios. Government program participation led to larger gains in expected returns as the availability of land increased. / Master of Science

Yes / In this paper, a stochastic approach for the operation of active distribution networks within a joint active and reactive distribution market environment is proposed. The method maximizes the social welfare using market based active and reactive optimal power flow (OPF) subject to network constraints with integration of demand response (DR). Scenario-Tree technique is employed to model the uncertainties associated with solar irradiance, wind speed and load demands. It further investigates the impact of solar and wind power penetration on the active and reactive distribution locational prices (D-LMPs) within the distribution market environment. A mixed-integer linear programming (MILP) is used to recast the proposed model, which is solvable using efficient off-the shelf branch-and cut solvers. The 16-bus UK generic distribution system is demonstrated in this work to evaluate the effectiveness of the proposed method. Results show that DR integration leads to increase in the social welfare and total dispatched active and reactive power and consequently decrease in active and reactive D-LMPs. / Ministry of Higher Education and Scientific Research of Iraq