Oil futures prices are often below spot prices. This phenomenon, known as strong backwardation, is inconsistent with Hotelling's theory under certainty that the net price of an exhaustible resource rises over time at the rate of interest. We introduce uncertainty and characterize oil wells as call options. We show that (1) production occurs only if discounted futures are below spot prices, (2) production is non‐increasing in the riskiness of future prices, and (3) strong backwardation emerges if the riskiness of future prices is sufficiently high. The empirical analysis indicates that U.S. oil production is inversely related and backwardation is directly related to implied volatility.

Oil futures prices are often below spot prices. This phenomenon, known as strong backwardation, is inconsistent with Hotelling's theory under certainty that the net price of an exhaustible resource rises over time at the rate of interest. We introduce uncertainty and characterize oil wells as call options. We show that (1) production occurs only if discounted futures are below spot prices, (2) production is non-increasing in the riskiness of future prices, and (3) strong backwardation emerges if the riskiness of future prices is sufficiently high. The empirical analysis indicates that U.S. oil production is inversely related and backwardation is directly related to implied volatility.

Oil futures prices are often below spot prices. This phenomenon, known as strong backwardation, is inconsistent with Hotelling's theory under certainty that the net price of an exhaustible resource rises over time at the rate of interest. The authors introduce uncertainty and characterize oil wells as call options. They show that production occurs only if discounted futures are below spot prices, production is nonincreasing in the riskiness of future prices, and strong backwardation emerges if the riskiness of future prices is sufficiently high. The empirical analysis indicates that U.S. oil production is inversely related and backwardation is directly related to implied volatility.

This paper considers a new approach to the analysis of stable relationships between nonstationary seasonal time series. The basis of this approach is an error correction model in which both long-run effects and adjustment parameters are allowed to vary per season. First, we discuss theoretical arguments for such a periodic error correction model. We define periodic cointegration and compare this to the concept of seasonal cointegration. Next, we analyze statistical inference in the periodic error correction model A sequential procedure is proposed, consisting of a test for periodic cointegration, an estimator of the cointegration parameters and adjustment coefficients, and a class of tests for the hypothesis that some of the parameters are constant over the seasons. The finite sample behavior of the proposed test statistics is analyzed in a limited Monte Carlo exercise. We conclude the paper with an application to a model of aggregate Swedish consumption.

The relationship between asset demand and information quality in rational expectations economies is analyzed. First the authors derive a number of new summary descriptive statistics that measure four basic characteristics of investment style: asset selection, market timing, aggressiveness, and specialization. Then they relate these statistics to the divergence between a given investor's information structure and the market average information structure. Finally, the authors demonstrate that informational differentials can be identified and consistently estimated, using ordinary least squares, from the time-series of observed asset demand.

[The purpose of this study is to determine the prevalence, magnitude and timing of retiree health care benefit reductions and to identify determinants of the benefit-reduction decisions. Three explanations for these benefit reductions are examined: (1) increased contracting cost caused by the financial reporting consequences of SFAS No. 106, (2) financial weakness independent of SFAS No. 106 and (3) firm-specific increases in retiree health care costs. Strong support for the increased contracting cost hypothesis is found after controlling for industry, financial weakness and firm-specific changes in retiree health care costs. However, the results also indicate that firms cutting benefits are financially weaker and have higher retiree health care costs at the time benefits are reduced. Therefore, SFAS No. 106 cannot be viewed as the sole cause of the health care benefit reductions.]

[A general prediction from the economic theory of tax reporting is that taxpayers will report more income as the tax rate increases, but the related empirical evidence has been mixed. We conducted an experiment to examine whether taxpayers' responses to a tax-rate change depend on both economic effects and perceptions of horizontal and exchange inequity. Our findings reconcile the previously inconsistent empirical results by identifying conditions under which perceptions of inequity drive taxpayers' reporting decisions. In summary, subjects reported less (more) income as tax rates increased (decreased) when they were inequitably treated relative to others, but not when they were equitably treated relative to others.]

This article tests the expectations hypothesis in the term structure of volatilities in foreign exchange options. In particular, it addresses whether long-dated volatility quotes are consistent with expected future short-dated volatility quotes, assuming rational expectations. For options observed daily from December 1, 1989 to August 31, 1992 on dollar exchange rates against the pound, mark, yen, and Swiss franc, the authors are unable to reject the expectations hypothesis in the great majority of cases. The current spread between long- and short-dated volatility rates proves to be a significant predictor of the direction of future short-dated rates.