Trade Transaction Costs Research Articles

Bilateral Trade in the Shadow of Armed Conflict

Does the shadow of war decrease trade? I examine the influence of conflict on bilateral trade and argue that trading firms’ expectations of armed conflict, both within and between nation-states, should decrease trade along with armed political violence. By assuming that firms care about future profits and assess the likelihood of a domestic or interstate conflict in the future that could disrupt trade, I argue that increasing the expectation of a domestic or interstate conflict raises the transportation, transaction, and production costs of trade. Empirically, contemporaneous trade levels should be negatively related to trading firms’ beliefs about the likelihood of domestic and interstate conflicts in the future. Statistical tests, using bilateral trade data from 1984 to 1997, show that expectations of domestic or interstate conflict, in addition to violent armed conflicts, are negatively correlated with bilateral trade levels. Theoretically and empirically, this research advances our understanding of the trade-conflict relationship by demonstrating how trading firms’ expectations about future conflict reduce bilateral trade levels.

A Review of Technical Assistance and Capacity Building Initiatives for Trade Facilitation

Trade facilitation can have a significant impact on economic development and poverty reduction. Studies by the OECD Trade Committee show that the benefits of trade facilitation reforms are multiple and occur on different fronts and for different stakeholders (i.e. government, private sector and consumers). More efficient international trade procedures and customs operations can significantly reduce trade transaction costs, which results in increased volumes of trade and welfare gains, particularly for developing countries. They can also increase competitiveness and the attractiveness for foreign investors, enhance revenue collection and help prevent corruption and smuggling. Hence, committing resources to support such reforms is a sound and cost-effective investment that can have multiplier effects for development.This Review of Technical Assistance and Capacity Building Initiatives for Trade Facilitation aims to contribute to current WTO negotiations on trade facilitation, which recognise that the adoption of multilateral rules on trade facilitation and implementation of some reforms requires technical assistance and capacity building. The review provides an overview of past technical assistance and capacity building for trade facilitation and highlights ways to enhance aid effectiveness based on past experiences.

The Profitability of Simple Technical Trading Strategies: The Case of Hong Kong

In this paper, we investigate two simple but very popular trading rules, simple moving average (SMA) and trading range break (TRB), by looking at a series of data of Hang Seng Index over thirty-five years, from 1972 to 2006. To avoid the data-snooping biases, we apply the out-of-sample tests in additional to the traditional tests to check for the validity of the profitability of the trading rules. In general, our results show that there is one trading rule, the (1, 50) rule, outperforms the market (HSI) over the 35 years testing period and in the pre-1986 sub-periods in our study in the SMA trading rule. These average returns from SMA rule are higher than the returns found in the US market (Brock et al., 1992) and Hong Kong market (Bessembinder and Chan, 1995). Besides, the VMA (1, 50) rule performs better than the FMA (1, 50) rule because it includes the information of the first nine days into investors' decision. With the flexibility of buy or sell within the first nine days, the VMA (1, 50) rule can generate 2.5% to 7.5% (annual) more profit than the FMA rule before transaction costs. However, the returns of the TRB rules are all small and insignificant. We find that the high trading returns are unlikely to be explained by the difference risk in difference trading strategies and transaction costs. However, they can be partly explained by the positive first order autocorrelation in the Hong Kong stock market and the time-varying premium. Furthermore, the inconsistent subperiod abnormal average returns suggest that the stock market integration leads to a more efficient dissemination of information over time in Hong Kong.

Execution Risk

Transaction costs in trading involve both risk and return. Risk is a result of price movements and price impacts over a gradual trading period. Return is associated with the cost of immediate execution. The trade-off between risk and return in optimal execution reflects the same risk preferences as in ordinary investment. Models of the joint optimization of positions and trades show conditions under which optimal execution does not depend on the other holdings in the portfolio. Optimal execution, however, may call for trades in assets other than those listed in the trading order; these can hedge the trading risks. The execution risk model for trading with reversals and continuations implies a natural measure of liquidity risk. <b>TOPICS:</b>Risk management, statistical methods

CO 2 emissions trading planning in combined heat and power production via multi-period stochastic optimization

The EU emissions trading scheme (ETS) taking effect in 2005 covers CO 2 emissions from specific large-scale industrial activities and combustion installations. A large number of existing and potential future combined heat and power (CHP) installations are subject to ETS and targeted for emissions reduction. CHP production is an important technology for efficient and clean provision of energy because of its superior carbon efficiency. The proper planning of emissions trading can help its potential into full play, making it become a true “winning technology” under ETS. Fuel mix or fuel switch will be the reasonable choices for fossil fuel based CHP producers to achieve their emissions targets at the lowest possible cost. In this paper we formulate CO 2 emissions trading planning of a CHP producer as a multi-period stochastic optimization problem and propose a stochastic simulation and coordination approach for considering the risk attitude of the producer, penalty for excessive emissions, and the confidence interval for emission estimates. In test runs with a realistic CHP production model, the proposed solution approach demonstrates good trading efficiency in terms of profit-to-turnover ratio. Considering the confidence interval for emission estimates can help the producer to reduce the transaction costs in emissions trading. Comparisons between fuel switch and fuel mix strategies show that fuel mix can provide good tradeoff between profit-making and emissions reduction.

Execution Risk

Transaction costs in trading involve both risk and return. Risk is a result of price movements and price impacts over a gradual trading period. Return is associated with the cost of immediate execution. The trade-off between risk and return in optimal execution reflects the same risk preferences as in ordinary investment. Models of the joint optimization of positions and trades show conditions under which optimal execution does not depend on the other holdings in the portfolio. Optimal execution, however, may call for trades in assets other than those listed in the trading order; these can hedge the trading risks. The execution risk model for trading with reversals and continuations implies a natural measure of liquidity risk. <b>TOPICS:</b>Risk management, exchanges/markets/clearinghouses

Comercio y poder en América colonial: Los consulados de comerciantes, siglos XVII – XIX

Comercio y poder en América colonial: Los consulados de comerciantes, siglos XVII – XIX

The Impact of Mode 4 Liberalization on Bilateral Trade Flows

This paper gives insights into the possible trade creating effects of service trade liberalization via Mode 4. In particular we expect that temporary movements of persons, like permanent movements, have the potential to reduce transaction costs for merchandise trade between home and host country. Exploiting data on H-1B beneficiaries from different origins in the United States and using a gravity model of trade, we find significantly positive effects of temporary movements of persons on bilateral merchandise trade. In addition to this, the paper provides insights into the determinants of temporary movements of persons.

Rebalancing Revisited: The Role of Derivatives in Portfolio Rebalancing

Portfolio rebalancing strategies involve trading tracking error off against the transaction costs of frequent trading to avoid tracking error. Existing analytical work derives optimal rebalancing strategies that result in minimal expected transactions required to achieve a given level of tracking error. Employing the strategies described in the literature can obtain the same level of tracking error as naive strategies often observed in practice with much lower transaction costs. We show that further (and substantial) reductions in expected transaction costs can be obtained by using derivatives to synthetically rebalance a portfolio. However, the design of an efficient synthetic rebalancing program is complicated. We show the key elements of the design of an efficient synthetic rebalancing program. Finally, we show how a rebalancing strategy should be designed when a portfolio experiences cash inflows and outflows.

The Effectiveness of Ferc's Transmission Policy: Is Transmission Used Efficiently and When is it Scarce?

We investigate the impact of creating Independent System Operators (ISOs) to independently manage regional electricity transmission resources and institute regional electricity exchange markets. Our analysis examines how the formation of the PJM Independent System Operator (ISO) in Pennsylvania, New Jersey, Maryland, Delaware (and other states) has affected electricity trading costs and the prevalence of quantity-constrained trade between PJM and the New York ISO, and between PJM and the more loosely organized ECAR (East Central Area of Reliability) transmission region. There are many complexities involved in modeling the transmission grid and determining precisely when electricity prices are affected by scarcity of transmission resources. This paper introduces a novel approach to identifying transmission scarcity and measuring electricity trading costs that does not require a comparison of physical electricity flow data with estimates of available transmission capacity. Instead, we use market data and an econometric model which estimates the probability that an observed inter-regional electricity price difference is consistent with one of three possible equilibrium states: autarky (i.e., no short-term trade), unconstrained trade (i.e., arbitrage), and quantity-constrained trade (i.e., transmission-constrained trade). Coefficient estimates relevant to explaining price differences in each state are obtained. We find that ISO formation may have facilitated electricity trade between regions, since binding trade-volume constraints occur with substantially greater likelihood when importing power into the more decentralized ECAR reliability area (as opposed to the centrally administered PJM ISO), even though physical transmission capacity is still apparently available. Our evidence also suggests that PJM's formation of an electricity exchange market initially reduced transaction costs for inter-regional trade by improving price discovery, but the overall impact has been to raise inter-regional transaction costs somewhat (perhaps due to the creation of seams issues). Finally, to contribute to the growing debate surrounding the adequacy of the U.S. transmission system, we use our daily pricing data and state probabilities to provide estimates of the marginal economic value of increased electricity transfer capability.

A Sovereign Debt Model with Trade Credit and Reserves

This paper analyzes sovereign debt in an economy in which the availability of short-term trade credit reduces international trade transaction costs. The model highlights the distinction between gross and net international reserve positions. Borrowed reserves provide net wealth and liquidity services during a negotiation, as long as they are not fully attachable by creditors. Moreover, reserves strengthen the bargaining position of a country by shielding it from a cut-off from short-term trade credits thereby diminishing its degree of impatience to conclude a negotiation. We show that competitive banks do lend for the accumulation of borrowed reserves, which provide partial insurance.

Environmental considerations on the optimal product mix

Several types of regulations limit the amount of different emissions that a firm may create from its production processes. Depending on the emission, these regulations could include threshold values, penalties and taxes, and/or emission allowances that can be traded. However, many firms try to comply with these regulations without a systematic plan, often leading not only to emission violations and high penalties, but also to high costs. In this paper, we present two mathematical models that can be used by firms to determine their optimal product mix and production quantities in the presence of several different types of environmental constraints, in addition to typical production constraints. Both models are comprehensive and incorporate several diverse production and environmental issues. The first model, which assumes that each product has just one operating procedure, is a linear program while the second model, which assumes that the firm has the option of producing each product using more than one operating procedure, is a mixed integer linear program. The solutions of both models identify the products that the firm should produce along with their production quantities. These models can be used by firms to quickly analyze several “what if” scenarios such as the impact of changes in emission threshold values, emission taxes, trading allowances, and trading transaction costs.

International capital markets and exchange rate stabilization in the CIS

In this paper, we examine the rationale for dollar and euro pegging in Russia and the CIS. We consider macroeconomic stabilization and transaction costs for international trade as rationales for pegging to the euro. Dollarization of international assets and liabilities are examined as determinants of exchange rate stabilization against the dollar. The impact of network externalities from a common anchor for all CIS countries is explored. Tests on de facto exchange rate stabilization reveal that dollar pegging has been pervasive in the CIS. Journal of Comparative Economics 33 (3) (2005) 425–440.

Does Immigration Help to Explain Intra-Industry Trade? Evidence for Spain

This paper argues and provides evidence that the stock of immigrants in a country has a positive effect on the share of its bilateral intra-industry trade (IIT). The paper links the literatures about immigration and trade and about IIT determinants. The key is that immigration contributes to trade transaction costs reduction and this would benefit the trade in differentiated products, i.e. IIT, more than the trade in homogeneous products, i.e. inter-industry trade. We test this hypothesis using Spanish data and departing from the models developed by Helpman. Results are robust to different IIT measures, estimation methods and specifications.

A CGE analysis of trade costs in the Russian agrofood sector

AbstractTen years after the end of central planning, enormous interregional price differences indicate that Russian food markets are not well integrated spatially. Trade potentials are thus not exploited, most probably because of high trade costs. Besides transport costs, transaction costs seem to play an important role as an impediment to interregional arbitrage. These transaction costs can be very high in transition countries due to underdeveloped market structures and weak public institutions. After subtracting transport costs from interregional price differences, large differences remain, particularly in the case of high‐value products. It is assumed that these residual price differences constitute the transaction cost component of total trade costs. The regional economic impact of different trade cost components is quantified using a bi‐regional computable general equilibrium (CGE) model. Simulations show that the results are quite different between the two stylized regions (East and West), depending on which trade cost component is reduced. While the welfare effects of varying customs tariffs and transport margins are rather limited, lower transaction costs of trade seem to be a promising way to achieve a better functioning food market in Russia.

Geographic Integration, Transmission Constraints, and Electricity Restructuring

We examine the impact on inter-regional trade in eastern U.S. electricity markets arising from the FERC-supported creation of Independent System Operators (ISOs). Our analysis focuses on the PJM ISO (Pennsylvania, New Jersey, Maryland, and other states) and its trade with the New York ISO and ECAR (East Central Area of Reliability). The formation of ISOs has been associated with two distinct impacts:(1) more centralized management of regional transmission resources; and (2) the formation of regional multi-party electricity exchange markets. We find that the former effect actually may have facilitated electricity trade between regions, since quantity constraints on trading volume occur with substantially greater likelihood when sending power into the loosely organized ECAR reliability area as compared with the more centrally administered PJM ISO. We attribute this to institutional impediments in obtaining a transmission path within ECAR that deter the use of physically available transmission capacity. This result supports FERC policy of encouraging the creation of ISOs. As for the impact of PJM's creation of multi-party energy exchange markets, our evidence suggests that the formation of these markets initially reduced transaction costs for inter-regional trade by improving price discovery, but the overall impact has been to raise inter-regional transaction costs somewhat. Finally, our estimates of the shadow value of adding incremental transmission capability provide useful empirical evidence for the debate surrounding the adequacy of the U.S. electricity transmission system.

Tax Systems, Financial Integration and Efficiency of European Capital Markets

This paper provides a critical assessment of the evolution of taxation of income from capital in Europe during the past decade.The introduction of the single currency has paved the way for important changes in European financial markets. Taxation of income from capital is one of the most important factor affecting investment decision. Proper measurement of cost of capital and return on investment cannot afford to ignore the wedges created by tax liabilities, as relative return on financial assets can be substantially altered when tax rates are brought to bear on the cost-benefit analysis of security holding and trade. To be sure, taxes are not alone in throwing sand-in-the-gears into European financial markets: trade and post-trade transaction and settlement costs as well as regulatory constraints may be hampering cross-border capital flows significantly. Substantial improvements in the efficiency of the European markets for fixed income securities, especially the degree of government and corporate bond market integration have been achieved in the nineties. Such efficiency gains can be largely attributed to the successful unification of monetary policy in Europe. As far as tax reform is concerned, the granting of tax-exempt status to foreign investment has been an important factor in fostering convergence in bond yields across Europe. Nowadays tax wedges implicit in bond yields and spreads appear to be quantitatively very small, if present at all. In contrast to the unsecured segment of the money and bond market, integration of the collateralised segment (repo market) has progressed at a slower pace. Also, the integration of European stock markets has proceeded at a relatively slow pace when compared to the rapid convergence of money and bond markets. As a result, benefits from geographical diversification of European stocks, over and above sectoral allocation, can still be gained under the single currency, despite the rising importance of industry allocation vis-a-vis country factors in driving stock returns in Europe.Our preliminary econometric evidence reported in this paper confirms that differential taxation drives a non-negligible wedge across stock market returns and valuation in Europe, as well as relative returns among large currency blocs (Europe, United States and Japan).

India's Informal Trade with Bangladesh: A Qualitative Assessment

The large and vibrant informal trade between India, and Bangladesh continues to thrive despite unilateral/regional/multilateral trade liberalisation in these two countries. This calls for an in‐depth analysis of India's informal trade with Bangladesh. Using insights from the New Institutional Economics informal and formal institutions engaged in cross‐border trade are contrasted to examine whether informal trading arrangements provide better institutional solutions. The analysis, carried out on the basis of an extensive survey conducted in India and Bangladesh reveals that informal traders in India and Bangladesh have developed efficient mechanisms for contract enforcement, information flows, risk sharing and risk mitigation. Further, informal traders prefer to trade through the informal channel because the transaction costs of trading in the informal channel are significantly lower than the formal channel implying that informal trade takes place due to the inefficient institutional set up in the formal channel. The principal policy implication from the study is that unless the transacting environment of formal traders improves, informal trade will continue to coexist with formal trade, even if free trade is established in the SAARC region.

The costs and benefits of early action before Kyoto compliance

Transaction costs have negative effects on emissions trading. Recent debates on the Kyoto Protocol have emphasized the potential threat of transaction costs to the implementation of emissions trading for the Protocol and consequently to the successful implementation of the Protocol. One way to suppress transaction costs is to use experience. In line with the EU Green Paper, we propose that an experimental early action before the Kyoto period could be helpful to reduce the transaction costs in emissions trading for the Kyoto compliance. However, because early action will incur additional costs, the final gain due to early action will be the cost-saving net of the costs of early action. This paper explores the relationship between the transaction costs in emissions trading and the early action effort to reduce transaction costs in the case of Kyoto Protocol. We find that in general early action can effectively offset transaction costs and thus are economically efficient. Only in the case of high transaction costs and constantly slow learning process, early action may become inefficient.

Revisit the Debate on Intermediation, Disintermediation and Reintermediation due to E-commerce

The existing literature opposing disintermediation adopts a very realistic but broad definition of intermediary functions, making the outcome of their arguments obvious, i.e. intermediation will always exist in one form or another. Supporters of disintermediation take a more focused definition of an intermediary, i.e. an economic player that buys from the seller and sells to the buyer and reduces their transaction costs of trading by doing so. It is difficult to reconcile the debate from these opposite ends because of the lack of a common definition of intermediaries. In this paper we have used the definition adopted by supporters of disintermediation to show that disintermediation due to web-based e-commerce is never a possibility. The paper uses a two-stage extensive form game with simultaneous moves in the first stage to analyse the effect of web-based e-commerce on intermediated offline channel structures. The model is solved for the Nash equilibrium. Depending on the relation between the mark-up of e...