Working Papers

  • [1801]

    Gerard Llobet, Jorge Padilla

    Conventional Power Plants in Liberalized Electricity Markets with Renewable Entry


    This paper examines the optimal capacity choices of conventional power generators after the introduction of renewable production. We start with a basic and generally accepted model of the liberalized wholesale electricity market in which firms have insufficient incentives to invest and we illustrate how the entry of renewable generation tends to aggravate that problem. We show that the incentives to invest in firm capacity (e.g. conventional thermal plants) may be restored by means of a capacity auction mechanism. That mechanism is vulnerable and, hence, may prove ineffective unless governments can credibly commit not to sponsor the entry of new capacity outside the auction mechanism. We explain that such commitment may be particularly difficult in the current political context where energy policy is conditioned by environmental and industrial-policy goals. We finally propose a way to enhance the credibility of capacity auctions by committing to optimally retire idle (conventional) power plants in response to entry outside the auction.

  • [1802]

    Gabriele Fiorentini, Enrique Sentana

    Consistent Non-Gaussian Pseudo Maximum Likelihood Estimators


    We characterise the mean and variance parameters that distributionally misspecified maximum likelihood estimators can consistently estimate in multivariate conditionally heteroskedastic dynamic regression models. We also provide simple closed-form consistent estimators for the rest. The inclusion of means and the explicit coverage of multivariate models make our procedures useful not only for GARCH models but also in many empirically relevant macro and finance applications involving VARs and multivariate regressions. We study the statistical properties of our proposed consistent estimators, as well as their efficiency relative to Gaussian pseudo maximum likelihood procedures. Finally, we provide finite sample results through Monte Carlo simulations.

  • [1803]

    Enrique Sentana

    Volatility, Diversification and Contagion


    In this paper I describe in detail the concepts of volatility, diversification and contagion, three basic keys to understand the seemingly whimsical behaviour of financial markets. The presentation is deliberately non-technical and largely self-contained, with most required concepts defined along the way. Nevertheless, the analysis is mostly empirically oriented, with an emphasis on the methods that have been proposed to measure those concepts and a discussion of the stylised facts that the resulting measures imply. I also use those measures to study the effects of the financial crisis of 2007-2008 and the euro sovereign debt crisis of 2010-2012 on Spain.

  • [1804]

    Gabriele Fiorentini, Enrique Sentana

    Specification Tests for Non-Gaussian Maximum Likelihood Estimators


    We propose generalised DWH specification tests which simultaneously compare three or more likelihood-based estimators of conditional mean and variance parameters in multivariate conditionally heteroskedastic dynamic regression models. Our tests are useful for GARCH models and in many empirically relevant macro and finance applications involving VARs and multivariate regressions. To design powerful and reliable tests, we determine the rank deficiencies of the differences between the estimators' asymptotic covariance matrices under the null of correct specification, and take into account that some parameters remain consistently estimated under the alternative of distributional misspecification. Finally, we provide finite sample results through Monte Carlo simulations.

  • [1805]

    Gabriele Fiorentini, Alessandro Galesi, Gabriel Pérez-Quirós , Enrique Sentana

    The Rise and Fall of the Natural Interest Rate


    We document a rise and fall of the natural interest rate (r*) for several advanced economies, which starts increasing in the 1960’s and peaks around the end of the 1980’s. We reach this conclusion after showing that the Laubach and Williams (2003) model cannot estimate r* accurately when either the IS curve or the Phillips curve is flat. In those empirically relevant situations, a local level specification for the observed interest rate can precisely estimate r*. An estimated Panel ECM suggests that the temporary demographic effect of the young baby-boomers mostly accounts for the rise and fall.


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