arXiv subjects

Mekonnen Tadese

Publications and source records attributed to Mekonnen Tadese.

6 recordsLinked to original sources

arXiv2025

Sensitivity Analysis of emissions Markets: A Discrete-Time Radner Equilibrium Approach

Emissions markets play a vital role in emissions reduction by incentivizing firms to minimize costs. However, their effectiveness heavily depends on the decisions of policymakers, future economic activity, and the availability of abatement technologies. This study investigates how variations in regulatory standards, firms' abatement costs, and emission levels influence allowance prices and firms' abatement efforts. This is done in a Radner equilibrium framework that incorporates intertemporal decision-making and uncertainty, enabling a comprehensive analysis of market dynamics and outcomes. The findings provide valuable insights for policymakers aiming to enhance the design and efficiency of emissions trading systems through a deeper understanding of stakeholder responses across varying market conditions.

q-fin.GN↗

arXiv2025

Comparison of Tax and Cap-and-Trade Carbon Pricing Schemes

Carbon pricing has become a central pillar of modern climate policy, with carbon taxes and emissions trading systems (ETS) serving as the two dominant approaches. Although economic theory suggests these instruments are equivalent under idealized assumptions, their performance diverges in practice due to real-world market imperfections. A particularly less explored dimension of this divergence concerns the role of financial intermediaries in emissions trading markets. This paper develops a unified framework to compare the economic and environmental performance of tax- and market-based schemes, explicitly incorporating the involvement of financial intermediaries. By calibrating both instruments to deliver identical aggregate emission reduction targets, we assess their economic performance across alternative market structures. Our results suggest that although the two schemes are equivalent under perfect competition, the presence of intermediaries in ETS reduces both regulatory wealth and the aggregate wealth of economic agents relative to carbon taxation. These effects stem from intermediaries' influence on price formation and their appropriation of part of the revenue stream. The findings underscore the importance of accounting for intermediaries' behavior in the design of carbon markets and highlight the need for further empirical research on the evolving institutional structure of emissions trading systems.

econ.GN↗

arXiv2024

Resolving a Clearing Member's Default, A Radner Equilibrium Approach

For vanilla derivatives that constitute the bulk of investment banks' hedging portfolios, central clearing through central counterparties (CCPs) has become hegemonic. A key mandate of a CCP is to provide an efficient and proper clearing member default resolution procedure. When a clearing member defaults, the CCP can hedge and auction or liquidate its positions. The counterparty credit risk cost of auctioning has been analyzed in terms of XVA metrics in Bastide, Cr{é}pey, Drapeau, and Tadese (2023). In this work we assess the costs of hedging or liquidating. This is done by comparing pre- and post-default market equilibria, using a Radner equilibrium approach for portfolio allocation and price discovery in each case. We show that the Radner equilibria uniquely exist and we provide both analytical and numerical solutions for the latter in elliptically distributed markets. Using such tools, a CCP could decide rationally on which market to hedge and auction or liquidate defaulted portfolios.

q-fin.RM↗

arXiv2022

Derivatives Risks as Costs in a One-Period Network Model

We present a one-period XVA model encompassing bilateral and centrally cleared trading in a unified framework with explicit formulas for most quantities at hand. We illustrate possible uses of this framework for running stress test exercises on a financial network from a clearing member's perspective or for optimizing the porting of the portfolio of a defaulted clearing member.

q-fin.RM↗

arXiv2020

Relative Bound and Asymptotic Comparison of Expectile with Respect to Expected Shortfall

Expectile bears some interesting properties in comparison to the industry wide expected shortfall in terms of assessment of tail risk. We study the relationship between expectile and expected shortfall using duality results and the link to optimized certainty equivalent. Lower and upper bounds of expectile are derived in terms of expected shortfall as well as a characterization of expectile in terms of expected shortfall. Further, we study the asymptotic behavior of expectile with respect to expected shortfall as the confidence level goes to $1$ in terms of extreme value distributions. We use concentration inequalities to illustrate that the estimation of value at risk requires larger sample size than expected shortfall and expectile for heavy tail distributions when $α$ is close to $1$. Illustrating the formulation of expectile in terms of expected shortfall, we also provide explicit or semi-explicit expressions of expectile and some simulation results for some classical distributions.

q-fin.RM↗

arXiv2019

Dual Representation of Expectile based Expected Shortfall and Its Properties

The expectile can be considered as a generalization of quantile. While expected shortfall is a quantile based risk measure, we study its counterpart -- the expectile based expected shortfall -- where expectile takes the place of quantile. We provide its dual representation in terms of Bochner integral. Among other properties, we show that it is bounded from below in terms of convex combinations of expected shortfalls, and also from above by the smallest law invariant, coherent and comonotonic risk measure, for which we give the explicit formulation of the corresponding distortion function. As a benchmark to the industry standard expected shortfall we further provide its comparative asymptotic behavior in terms of extreme value distributions. Based on these results, we finally compute explicitly the expectile based expected shortfall for some selected class of distributions.

q-fin.RM↗